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Monday, January 19, 2009

Many Hedge Funds Are Just Pyramid Schemes -- Arthur Nadal's Valhalla Just the Latest

How many hedge funds are actually just pyramid schemes? How many hedge funds that aren't hedge funds are seriously cooking their books?

Nobody knows, but as the financial bust continues the shakeout among hedge funds continues. The investors in Valhalla Investment Partners woke up this weekend to discover that their high-return hedge fund was just another pyramid scheme. Arthur Nadel, the owner of Scoop Management has disappeared and apparently taken investors' remaining moneys with him according to various news reports. The FBI is investigating.

The Valhalla fund reported annual returns of 32 percent from 2000 through 2006 -- yeah, right. But as Warren Buffet says, when the tide goes out you can see who is swimming naked, and it is pretty clear that Valhalla's returns were bogus all along.

Another philanthropist (it's easy to be a philanthropist when you are giving away somebody else's money), Arthur G. Nadel did not let being disbarred for fraud, dishonesty, and misrepresentation keep him from becoming a high-flying hedge fund manager. Even minimal due diligence by investors would have picked up this enormous red flag, but apparently no investors took the time to do so and now they've lost their money.

The problem with hedge funds is that they are opaque, nobody knows what is going on with them in any given moment, and probably many of them are just pyramid schemes. If you have money in a hedge fund, now is a good time to think about taking it out, as the hedge fund shakeout may last some years.

Source: Bloomberg click here


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At January 28, 2009 1:48 AM , Blogger Horalius said...

(This comment applies fully to Valhalla & Madoff)

"Full details of the exact losses are yet to emerge. Hedge funds and banks have so far admitted to having around £16billion with Madoff - only half of the total that is reckone d to have been lost. Some of the biggest casualties are Swiss private banks, which have taken hits amounting to about £2.5billion. Spanish bank Santander had £2.1billion of client money with Madoff. HSBC has admitted to lending about £600million to funds who wanted to use debt to gear up their positions with Madoff. RAB capital, the hedge fund that lost huge sums on investing in Northern Rock, has revealed that it is exposed to Madoff to the tune of around £6million."

Now the confession does not look right at all.

It is possible to accept the idea of a Ponzi scheme be played on members of the public, who are ignorant of how such schemes are worked, in fact the schemes are targetted specifica lly at such people. Yet Madoff would have us believe that he managed to convince professional investment companies to put their funds with him without any due diligence being performed. This is clearly nonsense.
And it would appear that there will never be [any evidence presented and financial fraud being demonstrated in a court of law. Why? It would appear that all the funds financial records are mostly "missing" (rather like Dov Zakheim's US$1.4tn) and those few records that do survive are in a terrible mess.

However, since the guy has pleaded guilty we do not need to demonstrate the fraud, because he says he is guilty.

And look further on the net and you will see that these "victims" have also been told by the US tax authorities that they will probably also be entitled to claim back some taxes on these defrauded sums.

Rather than saying this hedge fund has gone bust, due to its choice of investment assets and investment methologies, a scenario which is highly probable in the current financial paradigm, since all the professionals are predicting that at least 30% of all hedge funds are about to fail, more than 700 of them, the CEO chooses to fess up to fraud. If the CEO admits the fund has gone bust, then all those wealthy members of the Jewish community get nothing, but if the CEO admits to fraud they get their money back as compensation from the US tax payer...

by Muhammad Rafeeq (18th-Dec-08)
Available in various forms on the internet.

At January 11, 2010 2:06 PM , Blogger Lord Balto said...

"by Muhammad Rafeeq"
"If the CEO admits the fund has gone bust, then all those wealthy members of the Jewish community get nothing, but if the CEO admits to fraud they get their money back as compensation from the US tax payer..."

Methinks I detect a pattern here.


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