Doing Diligence

by Johnny Debacle

The Affair de Madoff offers many lessons to potential investors, lessons that should have already been widely known and obvious, but apparently are not. As masters of the obvious, we have provided a handy check list to aid in doing diligence on whom you trust your money with.

  1. If your investment manager has almost no volatility in his returns, either he is an annuity (and you are a moron) or he is lying (and you are a moron). An example of what to look for is if the monthly returns over 17 years looks like they were drawn with a compass (and likely were).
  2. If your investment manager is not charging fees, and is “making it up on volume” (more or less), step back and think about that for a second. If you were in Brazil and a whore said she wanted to give you a free sex because she was making it up on volume, what she really means is that you will wake up down a kidney or two. No different with an investment manager.
  3. If your investment manager goes to 100% cash for quarter and year end accounting purposes, red flags should be raised. Those specific red flags ought be “Is he doing this because it’s a Ponzi scheme and this allows him to better obscure his shenanigans?” and the answer to those flags should be “Yes.”
  4. If the auditor of your investment manager is a firm you have never heard of, or operates in a 15′ by 18′ foot shack in upstate NY or NJ, or is the brother in law of the principal of your investment manager, it is worth questioning the validity of the audit. Especially if your investment manager is the largest hedge fund in the world.
  5. If the compliance officer of the investment manager is the niece or brother of the principal, it is worth questioning the hardiness of the firm’s compliance policies. Here is a quick refresher. Things you want in a compliance officer — an independent agent assessing a company’s compliance. Things you don’t want in a compliance officer — a relative.
  6. If you cannot understand the return statements your investment manager provides, and no one else can either, it is worth questioning whether the returns are legitimate. It is sort of like buying a novel from a bookstore. If you receive said book, and not only is it not written in English but, as far as you call tell, it is written in no language known to man, you should ask for your money back.
  7. If your excuse for getting defrauded out of all your money by not observing any of these rules is that a lot of other smart people fell for the same thing, consider the fact that these other smart people are actually not that smart. If your excuse is that you knew something fishy was going on and hoped to benefit from it, you probably shouldn’t be allowed around money ever again.
  8. Never, under any circumstance, trust the SEC. It is not a coincidence that the SEC was also the acronym for Charles Ponzi’s Securities Exchange Corporation.
  9. Lastly, it’s important to actually, y’know, do diligence, so do it. It’s not called due diligence for nothing.
Related Reseach:

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  1. HAM05
    December 18th, 2008 | 11:35 am

    the fact that this didn’t happen in the malacca straight does not mean madoff was not a pirate. in fact, he may be the greatest pirate of all time.

    also, i highly recommend watching a current tv ‘vanguard’ production on piracy that documents a homosexual salor and his lifepartner as they meandre through indonesia/malaysia

  2. Platinumfinger
    December 18th, 2008 | 12:56 pm

    At least Madoff was decent enough to wait for a financial crisis so that these “loses” wouldn’t seem so bad in comparison to “real” investments

  3. american bandersnatch
    December 18th, 2008 | 3:06 pm

    Too long, couldn’t bother. I’ll just rely on my reputable swiss private bank to do the due diligence.

  4. December 18th, 2008 | 3:08 pm

    What is this “do-” or “due diligence” of which you speak? Is there anyone you could recommend that specializes in such things?

  5. December 18th, 2008 | 5:23 pm

    I can now safely assume that the reason I was not offered a job at FGG was because of my intimate relationship with Ashland Partners.

  6. December 19th, 2008 | 1:16 pm

    From the link: A positive performance in the
    past does, therefore, not constitute any guarantee for a positive performance in the future.

    Well now I know.

  7. Pleb
    December 22nd, 2008 | 12:20 pm

    >>>consider the fact that these other smart people are actually not that smart.

    Alas – a sound rule that is universally valid in economics, politics, and interpersonal relationships; and almost as uniformly ignored. Or as I put it to one of my friends waxing eloquent about how the new regime would finally hire smart guys with good educations to “run” the economy: “Dude, you’re swapping the HBS class of 1986 for the HBS class of 1996, or maybe Wharton ’93 with a certificate from LSE. What makes you think the new guys are any smartwer?

  8. December 23rd, 2008 | 1:43 pm

    The new guys are likely to be smarter and more honest, on average, than the old guys.

    Using the same statistics, for example, the new guys are likely to be taller on average than James Madison and John Adams.

  9. Regret
    December 23rd, 2008 | 5:22 pm

    Doo doo diligence.