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As the Madoff scandal continues to unwind, the best reading for background on the situation continues to be Harry Markopolos’ letter to the SEC in 2005 (pdf, html) entitled “The World’s Largest Hedge Fund is a Fraud”. Not only is his analysis of the Madoff situation spot on, his analysis of the funds and funds of funds that invested in him is also very true:

As far as I know, none of the hedge fund, fund of funds (FOF’s) mentioned in my report are engaged in a conspiracy to commit fraud. I believe they are naive men and women with a notable lack of derivatives expertise and possessing little or no quantitative finance ability.

This statement is not only accurate for the managers of the billions that went to Madoff, but also dead on for many other funds that are collapsing. This period has served as a stark and poignant reminder to the world that it is very, very, very difficult to successfully manage money over time.  Over the last 10 years, money management has been a boom industry as a rising tide has raised all ships.  Fund managers have been striding the earth like giants, bringing in jaw dropping incomes and gobbling up luxury properties around the world.

But the pendulum is begining to swing back hard.  Just track down someone who’s been managing money for +30 years, and you’ll realize just how far back it could swing.  They’ll tell you stories about the late 70′s when rotational programs at manufacturing companies were the hottest jobs around and money management was considered very boring.  MBAs wanted nothing to do with professional investing or money management.

The transition has certainly begun.  If you have skills regarding revenue generation and expense management, you’re pretty attractive to an employer right now.  People suddenly know about CDs and FDIC insurace.  The hardest jobs for MBAs to get this year will be at GE, Kraft, Amazon, 3M, Colgate, Unilever and the like.  Two years of investment banking experience doesn’t buy much any more, let alone a cush job at a fund and a shot at high six or even seven figures.

Money management as an industry will certainly survive.  The Bauposts, Bridgewaters, Berkshires, Kleiners, and TAs will still be managing lots of money in 2019.  But only time will tell how far back the tide will receed for the rest.