Hedge funds face 'massive' loss as Madoff arrested
Beleaguered investors face a "complete loss" from a scheme at the centre of a major US fraud case, which is likely to highlight their tendency not to question the legitimacy of big gains and ultimately lead to tighter regulation if the alleged fraud is proved.
A number of prominent funds of hedge funds are believed to have invested money in portfolios established by Bernard Madoff, a securities trader and investment adviser who was arrested yesterday before appearing at a Manhattan court charged with securities fraud.
US authorities claimed Madoff told employees at Madoff Investment Securities earlier this month that the investment advisory activities of his business had been "a giant Ponzi scheme".
Christopher Miller, chief executive of London hedge fund ratings agency Allenbridge Hedgeinfo, said: "Some very big investor names are involved in this. The scheme could only work if enough investors were subscribing for him to pay money out. Some of the world's biggest hedge funds have been hit by this. There will be a monumental impact for the hedge fund industry, it could be larger then Enron.
"Some investors in Madoff's funds face 100% write-downs on the money they invested, they will suddenly be nursing full writedowns in December. When people realise the magnitude of this it will be fizzing around the stratosphere."
One asset manager based in Switzerland, home to many high net worth individuals who invest in funds of hedge funds, said: "Everyone's talking about this in Geneva. Several wealthy investors could be facing big losses."
Funds of hedge funds are already facing losses of 19.1% from their investments this year, according to the non-investible performance index from data providers Hedge Fund Research. This combined with investor withdrawals have left them with 14% fewer assets than they started with this year, and $140bn, or 17%, less than their peak level in the second half of this year.
Miller said: "This is about the credulousness of investors to give the benefit of the doubt to good performance. What has caused all this to come to the surface is really net redemptions from the industry, because Ponzi schemes need net inflows to work. Some investors have the tendency to turn a blind eye to other possibilities when they get good news. But the impact of what has happened will be absolutely huge."
Miller said tighter regulation of the $1.6 trillion industry could result if the alleged fraud is proven.
Commentators have said losses from the fraud Madoff is alleged to have conducted could run to $50bn. This scale of loss would make it the largest in corporate history.
The Federal Bureau of Investigation has filed a criminal complaint that said Madoff lost "billions of dollars" on investments he made on behalf of wealthy individuals. It alleged that he had deceived investors by claiming he had made gains, while paying those redeeming money with funds supplied by new investors.
Madoff's lawyer Dan Horwitz told Bloomberg yesterday: "We will fight to get through this unfortunate set of events. He is a person of integrity.”
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