As we’ve discussed, many folks on Wall Street assumed Bernie Madoff was cheating–they just thought he was cheating by front-running instead of by operating a Ponzi scheme. Front running (placing trades ahead of clients) is illegal, but the conviction that Madoff was doing it didn’t stop some smart money from investing with him. On the contrary, it gave people confidence that Madoff really had an edge.
Of course, when you’re running a serious asset-management operation, you can’t market a manager like Madoff by saying that he wins because cheats. Instead, if you’re like Fairfield Greenwich, Tremont, and other funds of funds, you have to soberly explain that Madoff’s secret formula is a “split-strike conversion” strategy, while only occasionally conceding that what really drives his returns is market timing (the success of which you must attribute to “proprietary models” or some other hogwash).
So let us praise Thierry Magon de La Villehuchet, the French financier who killed himself after handing $1.5 billion to Madoff, for being forthright about what he believed Madoff’s edge to be:
WSJ: In the prospectus, [de La Villehuchet’s] Luxalpha [fund] refered to Mr. Madoff indirectly, describing the fund manager as a prominent New York broker and saying the large volume of trades the brokerage business handled allowed him to anticipate market movements by one or two hours and bet in the right direction 95% of the time. Investors in Luxalpha, the prospectus said, “will benefit from this unique and privileged position, in full compliance with the law.“
Of course, if all you needed to time the market correctly 95% of the time was a big brokerage operation, every brokerage firm on Wall Street would be cleaning up in the asset management game. So we’ll assume Luxalpha didn’t really believe that “in full compliance with the law” stuff.
But at least de La Villehuchet was more straightforward about what he believed Madoff’s secret to be than some American fund of funds.