Turning Down Bernie Madoff

Picture of Bernie Madoff

An essential part of career-related education is to “Learn From Experience”. Trying something in practice (and sometimes failing) is the way that learning is embedded in the brain, which is one reason that wisdom comes with age. However, not everyone can get the real-world experience that contributes to impactful learning, and so as part of IPI’s hedge fund certification courses we not only feature professional lecturers but also invite members of the industry to speak in live webinars, once or twice a month.

We were delighted this week to welcome Chauwei Yak, Founder and CEO of GAO Capital (www.gao-cap.com), to be our guest speaker in the hedge fund certification program’s Speaker Series webinar. She founded the company in 2008 and since then the firm has been recognized as a pioneer in the use of quantitative techniques in the hedge fund investment space.

In a previous role, Chauwei was Director of Research at a multi-billion dollar family office in New York, where her responsibilities included performing Due Diligence on hedge fund investments. She shared with us some of the lessons she learned about identifying “red flags” and how to assess their importance, and also her thoughts on why people continue to invest in fraudulent funds despite the publicity surrounding major incidents.

One theme that we discussed was FOMO – the Fear Of Missing Out. It’s clear that inexperienced retail investors are often guilty of acting based on FOMO, but what’s less well known is that experienced institutional investors often also fall victim to this way of thinking. It’s exacerbated by a belief that if other institutions have invested, they must have done their own due diligence and cleared the investment – a kind of crowdthink. And there is also perhaps an element of laziness or complacency that creeps in to Due Diligence departments, who find themselves ticking boxes rather than thinking through the actual meaning of the questions. These certainly seem to have been factors in the Madoff fraud – Madoff carefully managed the entry points to the fund and made it seem very exclusive to be able to invest there – this generated FOMO. And his standing in the financial services industry, and the fact that the SEC had investigated him and cleared him, gave many in the institutional investing community a sense of comfort. Chauwei pointed out that many investors went in through feeder funds, where they expected the feeder fund manager and fund administrator to have conducted the due diligence – in fact, even in this situation, it is best for an investor to do their own review.

Chauwei also pointed out that it is very easy to be attracted by the appearance of wealth – that pictures of a lavish lifestyle seem to indicate that the person leading that life is successful and legitimate. However, for many experienced due diligence professionals, a lavish lifestyle is actually a red flag that indicates caution. In the “Operational Risk Management & Operational Due Diligence” module of the Henley Executive Hedge Fund Program we cover different types of red flags in detail.

Chauwei also shared with us the effects of the global pandemic on ODD. In normal times, she would always go to visit the premises of a prospective investment, and talk with multiple people at the firm. Now that travel is severely restricted, she has had to switch to online interviewing. But how to get a feel for the reality of the offices? Simple – she has an employee of the fund walk round the premises whilst videoing it.  

When talking with the employees, her aim is to find out if they know what they are doing...also to assess the coherence of the team, and their understanding of the overall strategy. Dysfunctional teams and individuals who don’t have a firm grasp of their role are clear red flags.

 

As an investor herself, Chauwei understands the importance of hedge fund education for investors. Although investors may know enough about investing strategies to perform an Investment Due Diligence process to see if they want to invest in a particular fund’s strategy, without some element of hedge funds training, it is impossible for an investor to perform an effective Operational Due Diligence review. IPI’s hedge fund training program, the Henley Executive Hedge Fund Program, includes modules on all the key aspects of running a professional hedge fund, and so gives investors the key facts that they need to probe fund managers on their management capability. Important relevant modules include Structuring and Set-up, Business Management & Administration, Operations & Technology, Ethics, Compliance and, of course, Operational Risk Management & Operational Due Diligence. The hedge fund certification program modules all include on-demand video lectures by experienced professionals so that students get the benefit of their accumulated wisdom.

 

In our 1-hour webinar we discussed many other topics too. If you would like find out why Chauwei turned down investing in the Madoff fund and hear more of her thoughts and our conversation, a recording of the webinar is available as part of another key offering in our hedge fund training school - the IPI Career Network. The IPICN gives you access to recordings of virtually all of our Speaker Series events, and you can join future online events in person too. You also get a discount off all of our hedge fund courses, including “How Does a Hedge Fund Really Work?” and the Henley Executive Hedge Fund Program. Membership of the IPICN also includes access to our online mentoring platform, where we connect mentors and mentees from around the world. And our jobs board brings members the latest roles from employers in the hedge fund industry, who appreciate the value that our hedge funds training brings. And when we are all allowed back into the world and normal gatherings return, we will be holding our famous “Networking Cocktails” events in financial centres around the world, free to members of the IPICN.

And if you’re looking for introductory hedge fund education, for example a non-certificate, shorter hedge fund course, then you can also find our individual hedge fund courses on our website. Join on our Hedge Fund Training Program and Henley Business School Online Program.