I know it's hard to believe that sad saga of Bernie Madoff is a sign of good things to come, but it is. Fraud goes part and parcel with the bursting of any bubble and the hedge fund industry had definitely entered bubble territory. Years ago, Jim Rogers said in an interview "we have 25 000 or 30 000 hedge funds around the world. We don't have that many smart 29 year-olds in the world." Hedge funds are not a different asset class. If you believe that anyone can post positive or market-beating returns every year, regardless of market conditions, you aren't a sophisticated investor. You're either naive, stupid, or greedy.
Don't for one minute think that this is the end, though Madoff might go down as the poster boy of this era of financial tomfoolery/skulduggery. We've only begun to look for malfeasance. Think for a moment about everyone that was getting rich this decade. So far the real estate and financial realms have been carpet bombed, but what about the private equity guys? Are you telling me that there isn't one major fraudster out there amongst the Web 2.0 set? The resource industry is rife with slippery snake oil salesmen. I'm sure the alternative energy biz will produce a Madoff or two.
We just haven't had a perp walk yet.
I digress. These revelations, while painful, embarrassing, and criminal, are an important signal that excesses are being rung out of the system. We're starting to get our act together. Healing requires puss, bruising, scarring, and pain. We should want to hear as many of these stories as possible, get them priced into the market, so that we can move on.