"It’s a proprietary strategy, I can’t go into great detail."
This was the answer that Mr. Madoff, the former chairman of Nasdaq, gave when asked a few years ago how he was able to give such steady returns. He has now been arrested and he’s admitted that his hedge fund was one big Ponzi scheme.
This would have been the same answer that you would have got from many hedge fund’s if you actually had the insolence to ask them what they might be doing with your money. Which might make you think about the difference between a Ponzi scheme and the strategies
of many hedge funds who put together strategies that worked most years but then completely blew up eventually.
Any options trader will know that this is an easy strategy to create by going short premium, which will work 4 years out of 5, and you hope you collect a few bonuses before the 1 in 5 years “Black Swan” comes along.
As we now reflect on the credit bubble period, where hedge funds opened every day to take advantage of the ever expanding financial casino, its quite clear that Warren Buffet was yet again spot on in describing hedge funds as a “Repackaging of remuneration.”.
In 2007 over half of the highest earners in the US were in finance, and most of those running hedge funds. I dare say Mr. Madoff was one of them. This was the pinnacle of the great re-allocation of wealth that took place as the financial system continued
to enrich its participants at the loss of just about everyone else.