Madoff fiasco: a reminder why property's tops
2008-12-17 · Property Related Events
Another financial scandal, another reason to be a DIY real estate investor.
Investors have been dished up another great reason to invest directly in assets like bricks-and-mortar and forgo all temptations laid in their paths by so-called investment professionals and intermediaries: The Madoff saga in the US.
For the uninitiated, this is yet another money scandal of staggering proportions to send shock waves through global financial circles. In broadbrushstrokes, Bernard Madoff is a US investment broker manager and former Nasdaq chairman who allegedly masterminded a US$50bn Ponzi - or pyramid scheme.
This is where a business or investment cannot produce returns on its own but relies on money brought in by newcomers to pay those already in the system. Sounds simple, but Madoff apparently managed to fool many highly educated professionals in the international financial services world.
Big global companies, including large banks, with employees who should know better invested client funds via various schemes and funds in Madoff's offering.
Critics have been asking what funds of funds were doing channelling client funds to a Ponzi scheme. The big question: What happened to due diligence?
Back in South Africa, funds of funds have proved highly popular and have been recommended by financial intermediaries to their clients.
You may not know your money is in a fund of funds, however this is the underlying structure for many company pension funds. They are also popular among hedge fund investors, who feel more comfortable divvying up their money across a range of opaque funds.
Essentially a fund of funds is a collective scheme that takes your money and in turn invests it in several funds.
The idea is that the "fund of funds" professional is skilled at choosing the best investment managers and, because these individual managers are human, it is a good idea to spread the risk between them.
So, for a healthy fee the fund of funds' manager will carve out your savings between these other professionals.
Unfortunately, the extra layer between you and your money means less money for you in the long run because costs eat into your returns. That until now has been the biggest reason to avoid a fund of funds investment.
The Madoff saga highlights another evil associated with funds of funds: risks associated with the gatekeeper.
It is all very well spreading your risk between asset managers who may or may not deliver returns. But what about the actual fund of funds' manager?
How do you know you are in good hands? That this highly-paid manager is doing the job properly? Or merely ticking boxes?
Answer: you don't really know - is what has been elucidated by the Madoff matter.
So if we can't trust the fund managers or the fund of funds' managers, what are we to do?
Simple: be a do-it-yourself investor and keep things straight-forward.
The easiest, most transparent asset class for us mere mortals who don't have several post-graduate degrees in high finance, as no doubt many of the Madoff-linked investment professionals would have behind their names, is real estate.
What you see is usually what you get with property when you invest directly. The risks are fairly obvious and, provided you do your home-work, don't over-gear or over-capitalise and stick to a longer-term period, you can't go wrong.
You are in control of your investment. Generally, you can see trouble coming: an area might be decaying or a tenant starts paying late, are some of the examples.
This is unlike the many collective schemes on offer out there where by the time signs of trouble emerge it is generally too late for the nameless, faceless investors to extricate themselves from an ugly mess.
As the Madoff debacle illustrates for investors: if you don't understand what you are invested in and can't see through the structures, stay away.
Investors have been dished up another great reason to invest directly in assets like bricks-and-mortar and forgo all temptations laid in their paths by so-called investment professionals and intermediaries: The Madoff saga in the US.
For the uninitiated, this is yet another money scandal of staggering proportions to send shock waves through global financial circles. In broadbrushstrokes, Bernard Madoff is a US investment broker manager and former Nasdaq chairman who allegedly masterminded a US$50bn Ponzi - or pyramid scheme.
This is where a business or investment cannot produce returns on its own but relies on money brought in by newcomers to pay those already in the system. Sounds simple, but Madoff apparently managed to fool many highly educated professionals in the international financial services world.
Big global companies, including large banks, with employees who should know better invested client funds via various schemes and funds in Madoff's offering.
Critics have been asking what funds of funds were doing channelling client funds to a Ponzi scheme. The big question: What happened to due diligence?
Back in South Africa, funds of funds have proved highly popular and have been recommended by financial intermediaries to their clients.
You may not know your money is in a fund of funds, however this is the underlying structure for many company pension funds. They are also popular among hedge fund investors, who feel more comfortable divvying up their money across a range of opaque funds.
Essentially a fund of funds is a collective scheme that takes your money and in turn invests it in several funds.
The idea is that the "fund of funds" professional is skilled at choosing the best investment managers and, because these individual managers are human, it is a good idea to spread the risk between them.
So, for a healthy fee the fund of funds' manager will carve out your savings between these other professionals.
Unfortunately, the extra layer between you and your money means less money for you in the long run because costs eat into your returns. That until now has been the biggest reason to avoid a fund of funds investment.
The Madoff saga highlights another evil associated with funds of funds: risks associated with the gatekeeper.
It is all very well spreading your risk between asset managers who may or may not deliver returns. But what about the actual fund of funds' manager?
How do you know you are in good hands? That this highly-paid manager is doing the job properly? Or merely ticking boxes?
Answer: you don't really know - is what has been elucidated by the Madoff matter.
So if we can't trust the fund managers or the fund of funds' managers, what are we to do?
Simple: be a do-it-yourself investor and keep things straight-forward.
The easiest, most transparent asset class for us mere mortals who don't have several post-graduate degrees in high finance, as no doubt many of the Madoff-linked investment professionals would have behind their names, is real estate.
What you see is usually what you get with property when you invest directly. The risks are fairly obvious and, provided you do your home-work, don't over-gear or over-capitalise and stick to a longer-term period, you can't go wrong.
You are in control of your investment. Generally, you can see trouble coming: an area might be decaying or a tenant starts paying late, are some of the examples.
This is unlike the many collective schemes on offer out there where by the time signs of trouble emerge it is generally too late for the nameless, faceless investors to extricate themselves from an ugly mess.
As the Madoff debacle illustrates for investors: if you don't understand what you are invested in and can't see through the structures, stay away.
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