Thereby policing Exec behavior to produce sustainable, strategies and cash flows from operations as opposed to quick hits that result from unwise risk taking and or accounting artifice. Who cares what the exact % is that would be doled out to the EXEC as long as the payout methodology is based on a potential flash-in-the-pan NI that directly promises unlimited short-term upside compensation and complete ruin thereafter for all save for the EXEC.

I agree with ardano on certain things and I do feel that FOFs do have a place here. Where else could one invest in a real professional fund manager (or rather, TRADER) who is capable of producing a return over risk investment that are much much better than any other long only funds out there? There are lots of legendary traders out there who have made their clients extremely rich, but historically, it has only been accessible to the connected fews.

FOFs have made it possible for the average mums and dads to further diversify their investment portfolio through these alternative investment classes. The Madoff case is definitely an unfortunate and unexpected event. Who would have though a person of such high regards to do something like that anyway? But that does not ultimately means all the other FOFs out there are exist to grab fees and do not provide any value. Ok, in a real sense, they do not provide any real economic value, but at least they provide funds to hedge funds who in turn provide liquidity to the market as a whole.

So I agree there are lots of decent FOFs out there who do their due diligence well. But “black swan” events do happen and this is why managers / strategies diversification is a core part of the FOF structure.

I personally see the redemptions as an opportunity to future hedge fund managers to take back the market share once confidence is back up again. As well as taking advantage of extreme oversold assets due to the forced liquidation by hedge funds through redemptions.

Pension funds are hurting due to mismanagement, and municipalities are seeking bailouts after getting caught playing the auctions rates markets.

But what’s worse is that boards of directors, sophisticated investors and government agencies as well as millions of individuals thought their “professional” money managers could preserve their capital and even beat the markets.

A lot of fired money managers will be getting coal in their Christmas stockings this year, and many more should.

Back when we had financial markets, some FOF’s did perform a function. Like their long-only cousins , some consultants do indeed understand the benefits of an allocation model. Many investors can invest in a single hedge fund, but do not have the assets for multiple funds. A FOF is helpful to expose a potential investor to multiple strategies.

There are similar examples of ideas in the long-only world. For instance, who can afford to buy into Warren Buffet directly through Berkshire? There are vehicles used to mirror Buffet’s portfolio for a much smaller share price.

I am not defending abusive FOF’s. In the long-only world, consultants are usually able to get their cleints fee reductions. Through so-called wrap fee platforms many consultants and retail brokers are able to put together long-only with some alpa for investors who are one step above retail but one step below a true institutional client.

Over time the FOF’s began to resemble the funds they provided access to. In any crowded trade there are always abuses at the top. Hedge funds as an asset class are now being unwound. To paraphrase Jimmy Rogers a few years ago, we’ve now discovered that there aren’t that many smart guys with laptops…and investors did buy too many Ferrari’s.

However, there are many smart fund managers, who are honorable and do have their own money at risk along with their investors. There are also decent FOF’s who conduct valid research and monitor performance. Are the fees too high? Of course, but they’re too high in all classes of alternative investments. Pre-Madoff, hedge and fof’s were beginning to alter their models. That will obviously continue now. Unfortunately, it will also mean more unwinding in the first quarter of 2009 as funds will again have to sell positions to meet redemptions.

Jack Welch? John Chambers?

When does the investigative research begin?

In most of the articles I’ve read on this Madoff fraud/ponzi scheme case, there was some mention of fund of funds or hedge fund advisers who had either invested in the fund or bypassed an investment.

Here are a couple of recent article excerpts to compare and contrast.

From Bloomberg:

“Hedge fund investment adviser Aksia LLC warned clients last year not to put their money with Madoff after learning of “red flags” at his company, including that its books were audited by a three-person accounting firm. ”

Here’s one example of an adviser/FoF making the right call. I recall other examples of FoFs bypassing from the articles I’ve read, but can’t recall their names offhand (some firm execs maintained anonymity, like the one cited in Andy Serwer’s Fortune article). Some even go so far as to check out prospective funds and their managers by hiring private investigators to watch them!

Of course, there are the articles pointing to the major flubs made by other fund of funds, like this one from FT.com.

So, take these points for whatever they’re worth. I guess there were some advisers who did their job well, and some big ones who were not so skilled or lucky. I’m not an advocate or opponent of the fund of funds industry, just a casual observer of this debate.

READ THIS QUOTE from an article in my local journal regarding the Madoff scheme.

” KSM parses clients’ investments among a number of investment firms and investment vehicles. One of those firms is Redmond, Wash.-based Future Select Portfolio Management Inc. Future Select in turn invested through Tremont Capital Management, which in turn placed the money with Bernard L. Madoff Investment Securities LLC. ”

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