The Scam That Outscams "The Scam"

The Bernie Madoff Ponzi scheme is generally regarded as the biggest financial scam of all time. I don't agree.

Hedge funds, and particularly "fund of funds," make Bernie's despicable conduct look like small potatoes.

The underlying premise of hedge funds -- outsized returns with no increase in risk--is fatally flawed. Numerous studies have demonstrated the vast majority of these funds do not beat the returns investors could obtain for themselves, by investing in a simple S&P 500 index fund.

It was only a matter of time before these funds started to implode. According to a web site that tracks hedge fund failures, 108 funds at 66 firms have gone of business since 2006. Many more are sure to follow.

While the pitch of hedge funds is a scam standing alone, the "fund of funds" embellished the con. These funds charged 1% or more for selecting and monitoring the performance of "the best" managers.

This scam relied on the gullibility of investors who believe "best managers" is not an oxymoron. The data clearly indicates that it is. If you own an actively managed fund, the odds of it beating its benchmark over 1 year is 1 in 3, over 5 years it's 1 in 5, over ten years it's 3 in 100 and over 25 years it's essentially zero!

How anyone can claim to be able to beat these odds and convince so many sophisticated investors they should pay them to do so, is the poster child for a combination of greed and cognitive dissonance.

Enter the track record of Bernie Madoff. Fifteen years with steady returns of 11%. This was something fund of funds could really sell -- and they did. Some funds reaped hundreds of millions of dollars of fees for simply forwarding billions of dollars of assets to Madoff. These investors felt privileged to gain access to him and were happy to pay the fund fee, secure in the knowledge that Madoff was being closely monitored.

You know what happened next.

Here's the real scam: How motivated were these "fund of funds" to carefully monitor Madoff's performance? Did they really want to kill the golden goose? Or is it likely they either knew his returns were too good to be true or engaged in "willful blindness" to his fraud?

It would not have been difficult to detect his misconduct. He used an obscure accounting firm. He had no independent custodian. These are major red flags.

Or, they could simply have read a 2001 story about Madoff written by Erin E. Arvedlund in Barron's.

The article was skeptical of Madoff's track record and noted "[T]hree option strategists for major investment banks told Barron's they couldn't understand how Madoff churns out such numbers using this strategy."

Of course, real monitoring would have included replicating Madoff's results. No one has been able to do so....and with good reason.

The real beneficiaries of the scam are these funds. Their rewards dwarfed those received by Madoff.

They are the ones who engaged in the scam that outscams "The Scam."

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Comments

[rwe2late]

What about the Social Security Ponzi scheme ? talk about using new 'investments' to pay off claims of old 'investors'.

Then, of course, there is the whole fiat money scam of the non-federal 'Federal' Reserve .

[TrollDiddy]

Darned right! It gets no worse than the hundreds of millions of Americans over the decades who have been deceived by the Social Security Administration.

We youngn's are in for a nasty surprise in another couple decades. Who will bail the government out? lol...

[zippy the cow]

I've never perceived Social Security as anything other than a tax, plain and simple.

What? They say they're giving me money back? Whatever. I'm not counting on it.

[LeeCalif]

The latest is that taxpayers will be on the hook for this.

http://www.indymedia.ie/article/90328?ref=patrick.net

[PhilipTaylor]

TRUTHS:
1. If Greed > Fear then Greed WINS and AMERICA and the WORLD Loses
2. If Fear > Greed then Greed is STOPPED in its TRACKS and AMERICA and the WORLD wins
3. Fear = Justified Punishment for Crimes

We can rebound when

1. Regulations are back in place
2. When Fear of Punishment for Crime is Restored
3. When FAKE paper is Valued at the Market
4. When Two sets of Books are reduced to ONE Honest SET!

[PhilipTaylor]

Fear must be restored by investigation and prosecution of the criminals!

Only when Fear > Greed can we achieve control!

[Chavez08]

What? Did you think America could sustain itself on "Hungry-Hungry-Hippos" economics without running out of marbles? In Capitalism all is fair and all is for sale, and for steal. Winner take all. Social Darwinism.

The collective culture of Capitalism created Madoff, celebrated people like him in pop-culture, - created millions *just like him* and/or aspired to BE him and now the MSM is running out of bad-apples to distract us with so that Americans don't see the slimy, rotted trunk of the Free Market tree that's falling in the yard.

Free Market Capitalism failed miserably, *again*, tell the charismatic banker media puppets to acknowledge this and get with the revolution or shut the f**k-up.

[shastaman]

1961 Welcome to 'CAMELOT"

1981 Welcome to "SCAMELOT"

2001 Welcome to " DAMNED a LOT"

[rockyersocksoff]

How do we as a species expect to get past the lifelong narcotic of being lied to when we willingly teach our children to believe in Santa Claus, the Tooth Fairy, or some God that makes no logical sense?

[zizyphus]

The fake War on Drugs is the ultimate scam. The hedge funds are the beneficiaries. I thought the hedge funds were developed to provide a way for narco-traffickers to launder their billions. Any discussion of hedge funds that doesn't mention this vital role they play is not painting the complete picture. The big banks are just as guilty, as the world has now seen that the bankers are just gangsters, after all, thanks to the bailout fiasco. Organized crime has subsumed our government. Now they have sucked much of the value from our dollar, and defrauded the world with worthless securities, the bankers are revealed in all their glory as greedy thieves.

[saintswriter]

I admit I don't know much about the stock market, hedge funds, etc. But I think the "scam of scams" is how Bush and Cheney scammed the American people out of billions. Somehow I just don't think that it is a huge coincidence that all of a sudden the economy goes into the toilet a month before Bush & Cheney & company get their pink slips and all of a sudden we're paying the banks and investment companies $700 billion dollars. .

[shastaman]

PRECISELY!!!!!!

Welcome to "SCAMELOT"

[DocRichard]

What is the alternative? The alternative is an economy based on ecology, not based on abstract financial profit. http://www.greenhealth.org.uk/GreenEconom.htm

[Chip W]

I still don't know what a hedge fund is.
Thinking about Ponzi schemes, it doesn't seem like the smartest thing to get into, unless you thrive on stress. Once you get it going, there's no getting out; you have to keep making it bigger and bigger.

[tililek]

His 'interest' payments look like a return on investment. If part of what investors received was interest, and part return on investment, is does complicate their tax payments. Did they re-invest, or sent their 'profits' out of the country.

I d not envy the IRS agents at all!

[joebanana]

At the rate we're going, how long will it be before we're(the government) trading prisoners, to foreign countries to pay off debt. face it soon they will be our only commodity. And the prison industry is booming, even in a troubled economy. Kinda paints a grim future for us, don't it?

[joebanana]

The US government as a whole, is not only a scam, it's a blatant fraud. Someone once said, "we have the best government money can buy", All I can say is, "thank god we don't get all the government we pay for". When superior court judges willfully engage in conflict of interest, which is a "morals" issue, it proves to me, the whole system is dysfunctional, and corrupt, and yet it continues to operate as a "legitimate" entity. It's organized crime, and "we" are forced to abide by the archaic, outdated, "laws" this crime ring inflict on us, land f the free my ass.

[marijam]

I would have to say that I agree with you for many reasons, but the most important reasons for me are the following:

1) H-1B visas
2) Off-shoring
3) Out-sourcing
4) 401k accounts
5) "Freed trade"
6) Privatized roads
7) Foreign owned factories
8) "Stimulus payments" that are advances on income tax returns

[ATH]

The greatest fraud ever pulled off was the creation of The Federal Reserve Central Bank, which is actually a private corporation that works with the government and is set up in the fashion of a cartel.
They have the ability to print money "out of thin air" as they have no actual reserves--we have a fiat, or un-backed currency.
President Woodrow Wilson, who signed the Act into law, later deeply regretted the action: "I am a deeply unhappy man. I have unwittingly ruined my country. A great industrial nation is now dependent on its system of credit. We are no longer a country by free opinion...but a country by the opinion and duress of a few dominant men."
Henry Ford once said, "It is well enough that people of this nation do not understand our banking and monentary system, for if they did, I believe there would be a revolution before tomorrow morning."
This, and "the corporation," are what have lead us to be this:
5% of the population of the earth using up 25% of its resources, and accomplishing this at the price of traditional and economic warfare towards hundreds of third world countries: to basically steal their wealth and resources, either through economic war, or, if that doesn't work, we send in the military.
We can do better than this. We need to seperate Corporations from State, we need to return to sound and constituional money.

[KBinDE]

The biggest scam top me is that we have been lied to from the day we were born.