A charity called the *Picower Foundation had invested all of its assets with the Madoff's ponzi scheme. Apparently the charity's US$1 billion assets were managed by Madoff. From the surface, asset allocator proponent (like me) would just laugh off as saying this is due to the charity's own doing because it employed very poor asset allocation. However, if we would to look at the usual dynamics between an investor and the investment adviser, we will see that this is not necessarily due to the investor's own fault. Usually the investor would have already has some trust with his investment adviser. As the investor would expect the adviser to do the job well, it is on the onus of the investment adviser to employ prudent asset allocation. We cannot expect the investor to know what is meant by good asset allocation for if they can, they will just DIY. So in this case, the dear friend Madoff just took the money and invests 100% in its own product employing 100% of a particular strategy called collar trade. A person from the hedge fund industry of which one of its fund invested 100% in this ponzi scheme told me that this collar trade strategy is well known but the performance can be reproducable by others. Therefore, it appears that Madoff has something which others do not know. By hindsight we know that he indeed has something (or rather nothing). While we can say anything we like based on hindsight benefit, it is indeed troubling to know that if the investment adviser would to employ poor asset allocation, the investor is going in for a bad ride. So here are the things we can learn:

1. When engaging an adviser, ask your adviser whether is he or she investing everything into one company's product? This is applicable to insurance too because it is foolish to buy insurance from just one insurer. For IFA practice that has grow large AUM and due to cost-benefit reasons it is possible for such an IFA practice to create a product and ask everybody to invest in it. So ask your IFA whose products these belong to.

2. Don't just believe your adviser, look at the documents such as prospectus and benefit illustrations and ask yourself whether these companies are indeed unrelated entities (parent-subsidiary relationship is still just one entity);

3. Look for who is the ultimate counterparty. When purchasing structured notes, care must be made to identify who are the counterparties. While each note may appear to have a different “brand”, the counterparty could be the same. Thus there is no diversification even if you would to “diversify” your products. But I must admit this is not easy because sometime the prospectus itself is mis-leading and MAS does not guarantee the accuracy and the legality of the prospectus.
   

Finally there is one very weak link when making an investment. This is the Trustee. Normally the investment is held in a Trust or a custodian. What will happen if the trustee would to steal the assets away and report fictitious assets? Under current law, the Trustee is liable to be suit for fraud. But if the assets are not there anymore, investors are not going to get back anything. Even if the authority would to put all employees of the trustee to jail, it will still not help get back the assets. For this, I propose that the MAS consider insuring the assets held by Trustee against fraud.

*Source: Madoff causes charity to shut