Leading article: A tale of greed and fraud from the financial Wild West

Related Topics

As Warren Buffet, the most successful investor of all time, once noted, it is when the tide goes out that the world sees who has been swimming naked. But rarely has the world witnessed an exposure quite as traumatic as the collapse of Bernard Madoff's hedge fund.

When hedge funds first appeared on the financial scene, they were high-risk and high-yielding investment vehicles for the super-wealthy. But in recent years all manner of supposedly conservative investors, from pension funds to insurance firms, began ploughing cash into them, eager for a piece of the action. And so it is not just a handful of wealthy investors who have been scorched by the collapse of Mr Madoff's £33bn fund.

Losses are showing up in banks and financial institutions across the world. In Britain, HSBC and the Royal Bank of Scotland have admitted that they invested millions with Mr Madoff. Even local authorities in Hampshire and Merseyside were exposed. It is not just Mr Madoff who was swimming naked, but all those who invested money with him.

It is rather rich to hear supposedly sophisticated investors such as Nicola Horlick here in Britain blaming US financial regulators for not spotting what Mr Madoff was up to. It is no secret that hedge funds are inherently risky. Ms Horlick might do well to examine her own judgement for parking her client's money with Mr Madoff, rather than trying to shift responsibility.

Yet that is not to argue that the regulators are blameless in this sorry affair. Far from it. The US Security and Exchange Commission, charged with regulating the American financial sector, was clearly negligent in failing to scrutinise Mr Madoff's books. This is a symptom of a much wider regulatory malaise. The shadow banking sector, of which hedge funds are a central player, has been like the Wild West in recent years. Regulation has not been so much light-touch as non-existent. And this has been the case not just in the US but in London too, which is home to scores of hedge funds.

The Conservative Party leader, David Cameron, yesterday said there should be tougher penalties for financial fraudsters. Few would argue with that in the present climate. But the regulators also need to call time on insolvent traders before they implode spectacularly like Mr Madoff. Better regulation is essential. Investors must take responsibility, but we all need to be able to have confidence that the financial authorities are doing their job properly.

Some will argue this is all rather academic since the hedge fund model seems to be heading for extinction courtesy of the financial downturn. Hedge fund managers claimed to be able to generate stunning returns for investors in any economic conditions. And they extracted huge personal fees on the justification of their supposedly superior investment skills. But funds managed by the sector have posted vast losses this year. And investors are rushing for the door.

We now see that the impressive returns of the sector in the boom times were primarily a result of cheap credit. Fund managers made bets on movements in the markets with huge quantities of borrowed money. Now money is no longer cheap, their performance no longer looks so impressive.

Ultimately, the market will decide whether the hedge fund sector survives or not. But either way, there can be no doubt that the Wild West is in need of a competent sheriff.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Recruitment Genius: Sales Executives - OTE £60,000

£25000 - £60000 per annum: Recruitment Genius: Are you passionate about Custom...

Recruitment Genius: Care Workers Required - The London Borough of Bromley

£15000 per annum: Recruitment Genius: This homecare agency is based in Beckenh...

Recruitment Genius: Sales Executives - OTE £50,000

£25000 - £50000 per annum: Recruitment Genius: Are you passionate about Custom...

Recruitment Genius: Sales Executives - OTE £50,000

£25000 - £50000 per annum: Recruitment Genius: Are you passionate about Custom...

Day In a Page

Read Next
Polish minister Rafal Trazaskowski (second from right)  

Poland is open to dialogue but EU benefits restrictions are illegal and unfair

Rafal Trzaskowski
The report will embarrass the Home Secretary, Theresa May  

Surprise, surprise: tens of thousands of illegal immigrants have 'dropped off' the Home Office’s radar

Nigel Farage
Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Could cannabis oil reverse the effects of cancer?

Could cannabis oil reverse effects of cancer?

As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

The Interview movie review

You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
Serial mania has propelled podcasts into the cultural mainstream

How podcasts became mainstream

People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
Jesus Christ has become an unlikely pin-up for hipster marketing companies

Jesus Christ has become an unlikely pin-up

Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
Rosetta space mission voted most important scientific breakthrough of 2014

A memorable year for science – if not for mice

The most important scientific breakthroughs of 2014
Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

Christmas cocktails to make you merry

Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
5 best activity trackers

Fitness technology: 5 best activity trackers

Up the ante in your regimen and change the habits of a lifetime with this wearable tech
Fifa's travelling circus once again steals limelight from real stars

Fifa's travelling circus once again steals limelight from real stars

Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
Frank Warren column: 2014 – boxing is back and winning new fans

Frank Warren: Boxing is back and winning new fans

2014 proves it's now one of sport's biggest hitters again
Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas
La Famille Bélier is being touted as this year's Amelie - so why are many in the deaf community outraged by it?

Deaf community outraged by La Famille Bélier

The new film tells the story of a deaf-mute farming family and is being touted as this year's Amelie