There is not a soul in the world that I live in that has not been touched somehow by the Madoff scandal. Read Paul Kedrosky’s take on the “fraud of frauds“. He’s got a great read on the whole thing.
There are so many questions still left unanswered but I’d like to discuss what to do going forward. And I don’t mean from a regulatory point of view (for gosh sakes, the SEC didn’t find anything on the guy and even considered using him to help craft rules to govern hedge fund oversight. The irony!). I’d like to talk about an existing platform (and others like it) that would have enabled any daytrader in his pajamas to sniff out ol’ Bernie.
Review: What are expert investment communities
We’ve written extensively about expert investment communities. Expert investment communities are affinity groups of successful investors creating and sharing their analysis of the markets and stocks within a social networking framework. These types of groups used to exist offline in the forms of neighborhood or office investment clubs. With the advent of social networking tools, entire communities are sprouting up online and experts bubbled to the top with knowledge and influence in specific sectors, trading strategies, individual companies, and geographies.
Expert communities work like this:
- Investors sign up at sites like Covestor, Vestopia and Cake Financial and are required to link up their online accounts to their actual investment accounts
- Recommendations to buy or sell stocks are backed by real trades in the investor’s account
- Investors are encouraged to write about their trades, explaining the strategy backing each move
- Top performers in different strategies and with different risk profiles and participants are ranked on a variety of factors
- Other investors can peer into each others’ activities — learning, interacting, and bettering their own investment processes
How Covestor could prevent $50B frauds
I wrote yesterday how Timothy Sykes’ business is booming. One of the way’s he’s marketed himself (and yes, does he love marketing himself) is via his performance in Covestor, the leading investment community, tracking thousands of participants and multiple billions of dollars of portfolios. So, Tim has taken his trading god persona and verified his performance on Covestor (check it out — he’s up 5,413% annualized since inception by shorting penny stocks). Think of it as the Good Housekeeping seal of approval. No more boasting, no more locker room conquest stories. Everyone can see what an investor has done and the trades it.
With Covestor, what can Timothy Sykes, Bernie Madoff, Jim Cramer, et al not do? Fudge the numbers. Covestor provides a level of transparency into asset managers not seen before. While many funds and hedgies may refuse to join to avoid giving away the secret sauce, at some point, platforms like Covestor may just become the de facto, pay-to-play standard.
It may be too late for Bernie and those numerous investors burned by him but it may just save the industry.
