The shocking revelation that prominent investment manager Bernard Madoff’s hedge fund, Ascot Partners, was a giant scam will intensify redemptions from scores of other hedge funds that will be forced to liquidate holdings and increase downward pressure on stock prices.
This additional negative influence on the market, together with liquidations by mutual funds facing redemptions and endowments facing the need for liquidity, are three significant barriers for optimism about the direction of stock prices in the near term.
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The arrest of the 70-year-old Madoff, widely considered to have the magic touch as an investor, is another serious black eye for the hedge fund industry and all non-transparent investment vehicles. Investors across the New York area have clamored to be in Ascot because of the stability of double-digit returns and the reports of serious wealth creation. The scandal is bound to reveal the inner workings of the hedge fund industry, whereby intermediary feeders bring in their clients and take fees for putting clients with an investment manager.
If Madoff hadn’t faced $7 billion in redemptions, this Ponzi scheme might not have been discovered. What’s astonishing is that he got away with it for so long with nobody discovering it. What his four family members in Ascot knew is a puzzle that everyone wants answered, but one thing is certain: It’s virtually impossible to have returns like Madoff reported, and it should have been a major warning signal.
Aside from the impact on stocks overall, the exposure of fraud on a massive scale is also devastating to individuals who trusted Madoff with their fortunes and to nonprofit organizations like Yeshiva University, which counted on Madoff’s purported secret trading system to help operate its institutions. Sterling Equities, the investment