Nasher wrote:
Bernie Madoff ran a ponzi scheme. A pyramid scheme is totally different
I give you credit for knowing that there is difference. But, the difference is small. The most important characteristics of both are 1. fraud & 2. paying old investors with the deposits of new investors. The distinction between the 2 scams is, as you mentioned, that a pyramid scheme pays a variety of middle men to funnel money from those at the bottom of the pyramid to those towards the top. For Madoff this middle layer was occupied by a variety of entities.
1. “pension funds” from government, corporate, or academic institution on behalf of their future recipients.
2. “third party hedge fund marketers”
3. “financial advisors” aka “brokers”
4. “Fund of funds” aka “feeder funds” These are hedge funds that invest in other hedge funds. Most hedge funds charge “two and twenty”. Two and twenty refers to the 2% of assets under management & 20% of profits per year. Feeder funds add an extra layer of fees on top of this 2. For example a feeder fund might charge three and thirty.
In some cases there are multiple layers of middle men. Starting from the bottom of the pyramid we have Bob, out retail investor with an account at the SuperDuperBrokerageBank (SDBB). Bob's financial advisors, an employee of SDBB, invests some of bobs money in SuperShityFeederFund (SSFF), and SSFF invests some of their money with madoff. SDBB, SSFF, & madoff all take their cut. And I promise when bob refers his golf buddies to SDBB the broker sends him a very very nice bottle of wine.
“trust me” I should have known better then to write that (=