When big hedge funds fall, the whole industry feels the backlash. So it wasn’t altogether surprising that news of Bernard Madoff’s alleged and vast investment fraud prompted a round of calls for more hedge fund regulation and heightened transparency.
But the fact is that Bernard L. Madoff Investment Securities — though it was labeled as such by much of the mainstream press — wasn’t a hedge fund at all. Madoff in truth was just a money manager who didn’t charge the kinds of fees associated with hedge funds, instead billing his customers for each trade he supposedly made, a low-cost model. More important, and more ominous, he performed all administrative and brokerage duties himself, a huge red flag in the hedge fund industry — in any financial industry, for that matter. He managed, nonetheless, to build a reputation few ever challenged (see “What Were They Thinking?”).
That news organizations such as the Associated Press, Investors Business Daily, several London papers (the Daily Mail, the Evening Standard, The Guardian, The Independent) and Reuters could call Madoff’s operation a hedge fund showed the extent to which much of the business press misunderstood what he was doing, perhaps even misunderstood hedge funds altogether.
Not everyone was blind. In a 2,800-word article that appeared in May 2001 in the now-defunct MARHedge Report, reporter Michael Ocrant noted not just that Madoff wasn’t running a hedge fund but that whatever he was running was highly suspect. The piece ran under the headline “Madoff Tops Charts; Skeptics Ask How.” Ocrant, who now works for Institutional Investor, quoted Madoff as saying, “The strategy is the strategy and the returns are the returns,” with Ocrant adding this: “He suggests that those who believe there is something more to it and are seeking an answer beyond that are wasting their time.”
In mid-January, Ocrant told Alpha: “Madoff presented such a compelling front that very few people ever doubted him. He was trusted implicitly. When a reporter I knew attempted to revisit the story a little while ago, his editor just shrugged and said, ‘Why? It’s Bernie Madoff — forget it.’”
