It's a Mad, Mad, Mad, Madoff World - HBJ Cap Says, "Hedge funds will see further redemption pressure".

The Wall St Journal has plenty of stories on what’s shaping up to be the largest fraud case of all time:

Bernard L. Madoff, a former chairman of the Nasdaq Stock Market and a force in Wall Street trading for nearly 50 years, was arrested by federal agents Thursday, a day after his sons turned him in for running what they said their father called “a giant Ponzi scheme.”

Investors scrambled on Friday to assess potential losses from the $50 billion fraud allegedly perpetrated by Bernard Madoff, a day after the arrest of the prominent Wall Street trader.
Prosecutors and regulators accused the 70-year-old former chairman of the Nasdaq Stock Market of masterminding a Ponzi scheme of epic proportions through a hedge fund he ran.

Unlike most corporate fraud cases this one is pretty simple. Madoff’s hedge fund really was a straight-forward ponzi scheme: if you gave him a million dollars to invest he’d simply give the money away to existing clients telling them it was profit. When more clients joined up you’d get a slice of their life savings. As with all ponzi schemes the last people in are the losers.

Unfortunately, most of Madoff’s investors recapitalised their profits and handed them back to him to invest (at 10% ROI why wouldn’t you?). Two of his investors said that among his clients, Mr. Madoff was considered a money-management legend; they would joke that if Mr. Madoff was a fraud, he’d take down half the world with him.

A lot of high net-worth individuals will have woken last week up to find they have almost nothing left - but what’s really frightening is that reputable hedge funds and banks also had large investments with Madoff. These organisations will have charged their customers large fees to carry out risk analysis and due diligence on their portfolios and then just handed all the cash to a con-man to invest on their behalf.

The two most prominent hedge funds that invested with Madoff were the $7.3 billion Fairfield Sentry, run by Walter Noel's Fairfield Greenwich Group, and the $2.8 billion Kingate Global Fund, run by Kingate Management.

Impact of this can't be ruled out on hedge funds which are not regulated yet, there are many such funds operates now, redemption pressure will be felt now global equity will see the selling pressure from hedge funds again.

- JK, Associate, HBJ Capital