Almost all hedge funds are incorporated offshore. Indeed, the UK's FSA has said that it would not know what to do if one sought to register in the UK (although that may be a little tongue in cheek).
And then comes the news this week, that a hedge fund run by Bernard Madoff, a former Chairman of NASDAQ is nothing more than a fraud: a $50 billion Ponzi scheme where the supposed dividend returns to investors were simply the new cash injected by new investors. As Forbes notes:
If indeed, $50 billion was lost, as apparently Madoff claims, it is the largest such fraud in history, and one that might even shame the conman whose name is attached to this brand of deception. In 1920, Charles Ponzi, an Italian immigrant, began advertising that he could make a 50% return for investors in only 45 days. Incredibly, Ponzi began taking in money from all over New England and New Jersey. By July of 1920, he was making millions as people mortgaged their homes and invested their life savings. As with all frauds, he was discovered to have a jail record and was indicted on 86 counts of fraud. Some tens of millions of dollars were invested with him.
As they also say:
Expect Madoff to be one of the first jailed investors of the 2008 market meltdown. Hopefully, there will be others.
But that's not the real issue of concern. That issue is how this happened and the answer is plain: lax regulation and a lack of transparency (whether onshore or offshore, and I have not yet proven where Madoff was) allows this.
Boris Johnson called for loosened regulation in London yesterday. This is why we can't afford it. This is why he's mad to propose it. We need the exact opposite: better regulation, enhanced transparency and a simple process of putting out of business those who won't comply.
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Madoff was not running a hedge fund.
http://delong.typepad.com/sdj/2008/12/department-of-h.html
“Mr. Madoff was not running an actual hedge fund, but instead managing accounts for investors inside his own securities firm. The difference, though seemingly minor, is crucial. Hedge funds typically hold their portfolios at banks and brokerage firms like JPMorgan Chase and Goldman Sachs. Outside auditors can check with those banks and brokerage firms to make sure the funds exist…”
This is not thus an argument for greater transparency or regulation of hedge funds. Hedge funds are already subject to the transparency and regulation which make this impossible.
Tim
Funny how I can find almost no one who seems to agree with you Tim
Not least because, I admit, a wide variety of arrangements are considered hedge funds. It is therefore entirely appropriate to consider the fund Madoff ran to be a hedge fund of a sort, albeit a completely corrupt one by the look of it.
This though is not the real issue. Your argument that hedge funds are transparent and regulated is the ludicrous part of your post. Perhaps you are unaware of the fact that In Jersey, for example, a hedge fund requiring an investment of $1 million need not be regulated at all, nor need it be audited. This was chicken feed to those investing with Madoff. Even in a so called well regulated place like Ireland a hedge fund depositing a prospectus at 3 pm is guaranteed registration by 9am next morning. The average prospectus is 400 pages. They could be complete fiction for all the regulation that can be applied between 3pm and 5pm when the regulators go home.
In Luxembourg it’s even better. You apply for registraton and regulation after you’ve started trading.
And this is before you get into the land of small islands.
So Tim, you can live with your fantasy, but it is just that: a fiction of regulation. In the real world where most of us live we know the straw you’re clinging to is made of straw, like your argument is that of a straw man.
Richard
Richard,
My point is very simple. You cannot use Madoff to argue for breater regulation of hedge funds because Madoff was not running a hedge fund. Look at what Brad Delong (ex Clinton Administration, currently Berkeley Professor) says in the linked post.
“Surely this is an argument for more hedge funds? For more separation of portfolio and custodial functions?”
Tim
There is no accepted definition of a hedge fund.
It’s your definition against the rest as far as I can see.
You’re losing.
And we need more hedge funds? Are you kidding? Now? What are you proposing? The economics of the madhouse?
Richard
Umm, lessee, I’m using the definition of a hedge fund proposed by a (left wing) professor of economics. And he’s suggesting, as in the quotes, that this is an argument in favour of more, not fewer, such.
“And we need more hedge funds? Are you kidding? Now? What are you proposing?”
Someone with a great deal more knowledge than you or I is proposing exactly that.
Tim
And I’m saying he’s wrong
I know a lot of the arguments rolled out for hedge funds
I remain to be convinced. It seems to me that they are fairly and squarely part of the problem of creating an illusion of liquidity they could not deliver and hence encouraged risk which was greater, not less, than that the parties anticipated.
So no more, thanks
Richard
The BBC World Service reported the Madoff scam as a hedge fund. So I think Tim is just trying to split hairs to obscure the reality.
[…] contrary to what Richard Murphy is saying this does not show that hedge funds need more […]
It’s worth reading Francine McKenna on this. http://www.retheauditors.com/2008/12/stealing-easier-when-no-one-is-watching.html
It seems that Madoff was making it up as he went along so his precise legal form is less of an issue than his fundamental dishonesty.
Some are saying that because hedge funds were predicated on access to cheap money, they cannot survive. Wanna bet? US finance people have become remarkably adept at circumventing all manner of regulation. The fact we’re in a financial crisis won’t stop any of them.
[…] Of course none of this might matter to many of the professionals that read this stuff but be aware that someone, somewhere is almost certainly talking about you. If they’re not doing that, then they’re certainly talking about issues that matter. […]
The comment about Madoff’s fund not being a hedge fund is actually from the New York Times – http://www.nytimes.com/2008/12/13/business/13fraud.html
“Mr. Madoff was not running an actual hedge fund, but instead managing accounts for investors inside his own securities firm.”
So the NYT seem to believe there is a distinction as well.
Anyway what is the attraction of having everything regulated? These sorts of funds have always been regarded as being for ‘sophisticated’!! investors. If they want to risk their money on unregulated, risky investments then that’s their business. I wouldn’t put money into one but I don’t feel the need to tell everyone else how to do things.
Jonathan
And I have seen other comment today that says this as a rhedge fund under its registration details
The point that I made above is the most relevant one: there is no definition of a hedge fund.
It is a commonly applied term to a wide range of investment funds offering a wide range of investment opportunities. Arguing technicalities does therefore not appear to take us far.
I’m happy it is a hedge fund, generically. I am not happy that it was not properly regulated. I cannot see that Tim’s argument has credibility: it was regulated whether as a hedge fund or not.
It failed.
And yes, New York is on my list of tax havens. As is London.
Richard