According to Reuters, Ponzimonium is breaking out in the US.
"Hundreds of people in the United States are under investigation for financial scams, many involving Ponzi schemes, a U.S. regulator said on Friday, calling the phenomenon "rampant Ponzimonium."
While none are as mammoth as disgraced financier Bernard Madoff's $65 billion fraud, multimillion-dollar "mini Madoffs" are proliferating from New York to Hawaii, the head of the Commodity Futures Trading Commission said.
So far this year, the agency has uncovered 19 Ponzi schemes, which depend on an influx of new capital instead of investment profits to pay existing investors.
That compares with just 13 for all of 2008."
It's unsurprising that the hedge fund bubble which peaked in mid-2008 created a parallel bubble of criminality - fraudsters tend to go where the money is. Already, though, there are some lessons for investors.
Firstly, this round of fund fraud and failures will help investors understand the psychology of managers who turn out to be crooks. This, in turn, will help identify yellow flags next time.
Some managers are simply criminals from day one, but a surprising proportion start out honest. Only when they begin to incur losses do some make the tipping point decision to cook their books rather than reveal that they had lost money. Tracking the critical moment at which each asset manager decides to "go Ponzi" is one of the most useful lessons from each of these schemes.
The biggest lessons, though, reflect on the investor. As we have often said, investors have less appetite to ask tough questions when they are making money. The tendency to delightedly accept rather than skeptically question great returns is, of course, the basic behavior exploited by every Ponzi criminal. What does this mean for investors?
1) Due diligence is a necessity for every investor with respect to every investment. Madoff is the obvious proof that no-one is too good, too established or too big not to be subject to tough, systematic questioning.
2) Due diligence needs to be ongoing. Managers may be honest at the beginning but, as above, go Ponzi when they decide to double up rather than admit failure.
3) Investors must focus just as much on great performers as they do on laggards on the "watch list". It's precisely the fact that a fund has reported great returns that could be the clearest sign that all is not well.
Hedge Fund Operational Due Diligence
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