Headline of the Month

And the award goes to Brendan Conway for “He Madoff with It”, the title to his post in which he notes the wide-ranging effects of the $50 billion swindle by Nasdaq’s former chairman Bernard Madoff. Among those effects are the charities and endowments that have been hit hard by the fraud:

This well illustrates a phenomenon in hedge funds over the last decade or so: They don’t cater merely to Brad and Buffy any longer. As the drive for ever-larger returns increased at university endowments, private foundations, and pension funds, managers reached for ever-riskier, more exotic investments. This money is not merely for the privileged and wealthy.

For my part, I’m still in shock that a scheme of this scale could have gone on for as long as it did. I mean, I expect this kind of thing to happen in massively-multiplayer online video games, but the real world too?

Clearly, the fact that an operation of this scale slipped through the cracks will produce nigh-irresistable calls for regulation of hedge funds. But that regulation needs to be properly focused, according to FT’s John Gapper, who points out that Madoff’s scam technically wasn’t even a hedge fund and would likely never have gotten off the ground if it had been one.

Though regulation no doubt will have an important role to play in the wake of this fraud, the real lessons go beyond anything the SEC or FBI can be expected to do. The fundamental lesson here—especially in the case of some of the larger or instituional investors who ought to have known better—is to do your homework on the guy to whom you’re handing over your fortune.

UPDATE: Brendan Conway writes, “The bit about Madoff not technically being a hedge fund is a bit of a dodge in my opinion. This business was run out of Madoff’s broker-dealer business, but it was completely separate from that business. For all intents and purposes it was a hedge fund. The WSJ’s unsigned edit this morning makes the same point [as Gapper].”