Will there be more?

We all heard about Madoff and his ponzi scheme. The biggest reported ponzi scheme in the history of our financial markets. The basic theory behind a ponzi scheme is when the investment manager takes the new investor funds to pay out the existing investors who wish to redeem a portion or all of their capital. The fund reports a substantially high unrealized gain which in turn results in a high performance.

In a way, don't most funds that invest in illiquid securities act the same? They have investors coming in and out of the fund but they hold these securities that are not readily marketable and tradable. How do they pay out the investors that wish to redeem if they do not have a large cash position and they invest primarily in illiquid securities? Unless the fund is a plain-vanilla long short hedge fund that invests in readily marketable securities that trades at a primary market, it appears that most funds does not operate that much different from Madoff. It would be interesting to see if in 2009, how many more hedge fund fraud cases would come out.

When Bear Stearns (world's #3 investment house) failed, it was only a matter of time until Lehman failed and Merill got bought out by BoA; then, soon after, the $700 billion federal bailout. Usually when a large event occurs, it's only a matter of time until several others will eventually surface.