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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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