The Bernard Madoff ponzi scheme and continuous news flow will be headline news throughout 2009. The complicated world of hedge funds coupled with his fraudulent activities will make for a fiasco of legal wranglings, shareholder lawsuits and speculation for quite some time.
But, what really happened?
This question may never be answered in our lifetimes. One thing that may provide clarity still remains to be discovered. How many people were involved in hiding the facts?
It's difficult to believe one person could shelter such an elaborate scheme from investors (retail & institutional) and various regulators. You can't simply fault the SEC and SIPC either. They're more reactive than proactive at best. We would all like to think they are the gate keepers, but this simply isn't true.
In many regards, this situation all boils down to 'greed & fear'. Everyone is a capitalist on the way up and a socialist on the way down. Investors have to take some form of responsibility for their actions and not simply blame the SEC.
Personally, I think Mr. Madoff was running a bona fide hedge fund for a number of years. In hindsight, you could argue his performance over the last 10 years was too consistent to be true - which we now acknowledge. But, I think he was running a genuine business none-the-less.
It's easy to make money in an up market. From 2003 to 2007, the indexes all made money. A quick look at the Vanguard 500 Index Adm Fund (courtesy of Morningstar) shows total returns of 29%, 11%, 5%, 15% and 6%, respectively. A passive investment strategy would have yielded positive returns.
I think the bear market of 2008 was the unravelling of Bernard L. Madoff, LLC. A dismal year coupled with shareholder redemption's is a bad combination for any money manager. Liquidating both winning/losing positions to meet redemption's is problematic at best. Toss in the fact you could be highly leveraged in a hedge fund and things become tenuous. With no new investors in site, Madoff was left naked when the tide went out.
He may have been enhancing investor returns with new client money. But, the bull market from 2003-2008 helped him to cover his tracks. Let's face it, shareholders who were taking annual redemption's for living expenses received real dollars. How much of this was bona fide gains & dividends is certainly questionable. But, real money was received and spent. The remaining principal (if any) is now the big question.