The Madoff affair is yet another reminder to investors that there is no such thing as a sure bet, a West Midland financial adviser has warned.
One-time Wall Street high flyer Bernard Madoff, a former chairman of the Nasdaq stock market, is at the centre of an alleged $50 billion (£33.4 billion) fraud – the world’s biggest scam.
Victims include many top banks such as Banco Santander, owner of Abbey, which had $2.87 billion at stake, HSBC ($1 billion) and RBS ($599 million), along with a number of celebrities allegedly including film director Steven Spielberg’s charity, Wunderkinder Foundation.
Two classes of individuals and organisations have mainly been hit – those who had a direct relationship with Madoff and fund of funds investors, where one hedge fund invests in another.
Madoff, according to investigators, was essentially operating a “pyramid scheme” where money from newcomers is used to pay off existing investors.
Critics say it has highlighted a “fundamental lack of transparency” within the hedge fund industry.
Will Self, of Stratford-upon-Avon firm Self Chartered Financial Planners, said: “This unfortunate tale offers a bitter lesson to investors – steady returns and recommendations from friends and trusted advisers are no substitute for clarity and transparency. Many aspects of the Madoff affair are depressingly familiar.
“Including the lure of high returns with little risk, glowing testimonials from early investors, the sense of membership in a special club for those fortunate enough to be ‘in the know’, the trust in the promoter due to religious or social affiliation, the vague documentation investment strategy, the skimpy accounting and the speed of the ultimate collapse.
“Many of Madoff’s investors dismissed concerns about the difficulty of identifying the source of the impressive results. One claimed ‘even knowledgeable people can’t really tell you what he’s doing’.
“And there lies a cautionary message – if you don’t understand it, don’t invest in it.
“Indeed another old adage also applies – if it appears too good to be true then it probably is.”
Mr Self pointed out that the big frauds are usually exposed in recessions, with Madoff’s business being the first in the current cycle.
He doubts it will be the last.
“There is simply no such thing as a sure bet. Investors who get greedy are invariably burned,” he said.
And he pointed out there was no substitute for sticking to the fundamentals, holding your nerve in the short-term and keeping to a solid, unexciting but sound financial model.