Yes, that sounds plausible. The admission of failure and loss of respect could have seemed to him to be worse than the risk of arrest and jail.
Maybe, like General Motors, he hung on to the slim hope that he could turn it around and eventually make money legitimately for both old and new investors.
Bernie, if you are reading this newsgroup, please clear up all the confusion for us.
Could not explain his investment philosophy? I wish you were kidding, but I suspect that you're not.
In theory, the hedge funds who invested with Madoff should have been more sophisticated than their investors and better able to sniff out fraud.
That's pretty surprising. State regulators, at least, on a regular basis shut down folks who operate as IAs without registering, or who register but then don't operate in accordance with what they wrote on their ADVs. And they are usually way more serious about anyone who's IA shop either takes custody of client money or where the shop is affiliated with a B-D or other custodian. If you go to state securities regulators pages you'll regularly see listings of enforcement actions and in my observation a substantial number of the complaints include "failed to register and acted as an investment adviser or investment adviser representative in violation of the Act and Regulations". Or something similar.
To find the regulators in any of the states, start here: Sometimes you have to click through a couple of pages to find their enforcement listings.
It's really very surprising.
Some people say Madoff was running a hedge fund, but I heard a friend of mine saying he was running a bond fund. Which is correct?
Neither.
-- Rich Carreiro snipped-for-privacy@rlcarr.com
Neither, he ran a Ponzi scheme. His victims believed it was a hedge fund.
Joe
A hedge fund is like a mutual fund, but with stricter rules about who may invest, and looser rules about what the manager may do. Just like regular mutual funds, there are hedge funds which invest in stocks, in bonds, in commodities, etc. But there are also hedge funds which use more complex strategies. Madoff's strategies supposedly included buying a stock or an index then then buying and selling options on those underlying securities in order to (theoretically) eliminate the volatility and make a profit. Other hedge funds will buy one thing and sell short another and thus make bets on the relationships between the prices of those two things. Those "things" could be anything from stocks to bonds to currencies to index futures.
Notably, though, most hedge funds charge a percentage of assets under management, plus a portion of whatever profits are made for the clients. Madoff didn't charge any of that at all. In theory, his entire compensation was based on commissions that his advisory business generated for the broker-dealer which he also owned. To call that "questionable" is a vast understatement.
It is hard for small investors without much experience to appreciate that the best "financial advice" comes with a cost and the worst is often offered free of charge. Apparently the same can be true of more affluent investors. The desire to get something for nothing is so strong, that people fail to ask simple and obvious questions. Why is he telling me about this? What is his motive for recommending one thing rather than another? How does he get paid for all his effort? Financial advisors do not go around recommending various mutual funds, taking out expensive ads in the media, and hosting free dinners, all because of their charitable nature. They have to get paid somehow. When I need someone to fix my furnace, I have to pay for the work. Why should I expect someone to fix my finances free of charge? Inexperienced investors should constantly bear in mind the saying "He who pays the piper calls the tune."
And, judging by the recent Madoff situation, experienced investors should constantly bear in mind that "a sophisticated investor is an oxymoron".
Seriously though, as someone who is an outsider (from the investment industry), but a bit familiar (with the CFA curriculum at least), the Madoff thing leaves me with a great deal of distrust for the capabilities of the whole industry -- who can I trust? Madoff is not the only to blame -- what about the dozens of fiduciaries and direct investors that got suckered into skipping due diligence 101?
People who are experienced and know the right questions to ask and how to avoid scams when buying a car or hiring someone to fix their roof can lose their common sense when investing large amounts of money. It is amazing.
BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.