Money Never Sleeps… Does Hedge Fund Operational Due Diligence?
We all knew this day would come. Gordon Gecko, the fictional wolf of Wall Street portrayed by Michael Douglas in the 1987 film Wall Street is returning in a new soon to be released movie sequel called Wall Street: Money Never Sleeps.
Here is the trailer:
Mr. Gecko is most famous for the line, “Greed, for lack of a better word, is good.“ Here the clip where Mr. Gecko says the famous line at a stockholder’s meeting:
This new movie revisits Mr. Gecko 23 years later, after he is released for stock manipulation and other securities crimes.
In this film, Mr. Gecko tries to warn the world of the 2008 financial crisis (before it happens). Along the way he crosses paths with a hedge fund’s prop trader, Jacob, (played by Shia LeBouf). In a plot twist Jacob suspects, who else but the hedge fund manager for the death of his mentor….
In the pre-Madoff environment, and particularly in the 1980′s when the first Wall St. film takes place, business and operational shenanigans, may have foolishly been subject to lesser degrees of due diligence – which is perhaps why they either went undetected or grew out of control (i.e. – Ivan Boesky)
All this made me think in the post-Madoff environment if the Gordon Gecko’s of the world would still stand up to modern due diligence techniques? ….
Perhaps maybe this theatrical shareholder’s speech sums it up best:
Hedge Fund Operational Due Diligence: Corgentum Study Finds Madoff Ponzi Effect Influences Investor Due Diligence
Corgentum Consulting, the preeminent provider of the industry’s most comprehensive hedge fund operational due diligence reviews for investors, today announced the results of a new study focused on investor due diligence trends. This research shows that as a result of recent frauds and Ponzi schemes, a Madoff Effect has developed, altering the nature and scope of investor due diligence. The data also shows that in anticipation of stricter hedge fund regulation fund of hedge funds are focusing the bulk of their due diligence efforts on legal, compliance and regulatory risks.
The study, ‘The Madoff Effect – An Analysis of Operational Due Diligence Trends’, is available for download at www.Corgentum.com or directly here.
For this study Corgentum collected data from over 200 global hedge fund allocation organizations including fund of hedge funds, endowments, foundations, corporate pensions, family offices, large independent financial advisory practices, ultra high net worth investors and private banking organizations. “The data shows that frauds such as Madoff are an important, but potentially misleading guiding light around which investors tend to focus their due diligence on hedge funds” said Jason Scharfman, Managing Partner.
Investors, influenced by recent hedge fund failures, have refocused their due diligence efforts on operational risk areas where leading operational red flags were present. In particular, since the Madoff scandal broke, this study shows that the number of fund of hedge funds reviewing hedge funds cash management policies and controls increased by almost 60%. Other operational risk areas covered in the Corgentum study that have realized double-digit increases in attention from investors include transparency in reporting and the role of service providers such as auditors and administrators.
Corgentum’s analysis also demonstrates that certain operational risk areas continue to be dangerously neglected during the investor due diligence process. Less than 2% of the fund of hedge funds included in this study considered the independence of a hedge fund’s board of directors during the due diligence process. Other frequently overlooked operational risk areas included information technology infrastructure, personnel turnover and the quality of overall operations management.
“Investor’s must not only understand historical red flags, but be prepared to anticipate new ones. By incorporating proprietary benchmark studies of hedge fund fraud and models of operational inefficiency into our evolving operational due diligence process, Corgentum’s approach ensures investors keep up with the changing nature of hedge fund operational risk” said Scharfman. “Corgentum will continue to partner with fund of hedge funds, pensions, family offices and other investors to create tailored comprehensive hedge fund operational due diligence and ensure that their operational due diligence reviews are not misguided by fraud.”
Opalesque, published an article regarding the study . The article is entitled, “Madoff Effect continues to see investors focus more on fraud risk than operational risk” and is available at www.Opalesque.com or via direct link here (subscription required). Additionally, the press release regarding this study is available here. HedgeCo.Net and HedgeWeek also covered the study in this post.
Madoff Prison Pics (Sort of)…. And Ezra Merkin’s Fellons
While no pictures have been released of Madoff (aka prisoner No. 61727-054) in prison here is a photo/illustration of what New York magazine thinks it would look like:
In their article on Madoff’s prison life, New York magazine also provides insight into how other inmates view Bernie with this sketch by fellow inmate (and convicted bank robber K.C. White):
The article goes on to quote Madoff in prison as follows:
“F— my victims,” he [Madoff] said, loud enough for other inmates to hear. “I carried them for twenty years, and now I’m doing 150 years.”
Oh by the way, here is a video that sort of flew under the radar, J. Ezra Merkin allegedly employed a convicted felon named Victor Teicher who reportedly advised Merkin from jail in 1994 not to invest with Madoff. These allegations came out of New York University’s lawsuit against him:
