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so a hedge fund how does a hedge fund differ from a mutual fund
just using a broad example so
many of us have mutual funds
%uh
which charge anywhere from
you know a few basis points to one or two percent a year
just for the privilege of
babysitting our money
a basis point being a hundredth of a point correct
%um
hedge funds
which have really cropped up all over the place in the last few years
in addition to that
one or two percent a year
they take twenty percent
of the profits
and how do they differ in investment style well mutual funds are really very highly
regulated
they pretty much buy stocks and bonds maybe some options may be some
some real estate investment trusts
%uh and that's pretty much it
hedge funds can invest in everything
they can invest in
lawsuits
they can invest in commodities
gold
grains
%uh emerging markets
distress debt
%uh
so they're really no-holds-barred and they do it with leverage which is to say
they will borrow ninety percent of the purchase price they're paying put in ten percent of
their own money
if the price goes down ten percent they are wiped out that's right they've got to sell
get to get that to the ninety percent to give back to the people who lent it to them they're considered very risky
yeah for that reason
Madoff technically people have called him a hedge fund since the beginning but
I guess at the beginning but he's not really a hedge fund no so
here's the here's the the conundrum of Madoff so
he and his brother had this
very well-known brokerage firm
%uh for decades
meanwhile %uh
they had started out
I believe in the sixties %uh
started a sort of friends and family investment club
%uh they needed money to trade
and they started offering people say twenty or twenty five percent a year returns
they claim to be doing and arbitrage strategy
and
that I think was sort of the beginning of this
quasi quote unquote hedge fund
which really I think was just
a ponzi scheme from the beginning which basically a ponzi scheme is just a a pyramid scheme
money
money comes in
from new investors and goes out to pay old investors
and no investments are ever made 0:02:27.019,0:02:30.729 do you think well %uh I see some people have said
Madoff has claimed
a very trustworthy fellow
has claimed that it started in nineteen ninety two the %uh the government claims it started in the
late eighties
some people think it started at the beginning you think it started at the beginning
and but do you think that at the beginning
Madoff was making
%uh actually making profits
in the sixties and seventies
you know I do
%uh I don't think it was that difficult
to make twenty to twenty five percent a year because
back in the nineteen sixties %uh
this spreads or rather that the buy and sell pric for stock on Wall street was
could have been several dollars you know I buy IBM at five and I sell it for eight dollars
an enormous profit margin
still the broker would buy it and sell it
He'd buy from the person that wants to sell you he'd sell it to person that wants to buy
he buys it low he sells it high
make a lot of money very lucrative yes
it's not any more
partly because we have technology now and we also trade in pennies
so I buy at a dollar and I sell at a dollar
and two cents
so I think it was possible
that he was actually making that money