Hedge funds have to be regulated and transparent, or be put out of business

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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.