Bernie Madoff’s ponzi scheme hedge fund had almost $70 billion (?) in AUM at its peak. Not adjusting for interest, if it existed today, it would be about the 6th biggest hedge fund, roughly tied with Two Sigma Investments.
Madoff’s scheme lasted 17 years, and if it had existed today, it would be the youngest hedge fund on the list by 5 years. Most top-10 hedge funds were founded in the 70s or 80s and are therefore 30-45 years old.
Theranos was a $10 billion company at its peak, which would have made it about the 25th largest healthcare company if it existed today, not adjusting for interest. It achieved that valuation 10 years after it was founded, which a very cursory check suggests it was decades younger than most other companies on the top-10 list.
FTX was valued at $32 billion and was the third-largest crypto exchange by volume at its peak, and was founded just two years before it collapsed. If it was a hedge fund, it would have been on the top-10 list. Its young age unfortunately doesn’t help us much, since crypto is such a young technology, except in that a lot of people regard the crypto space as a whole as being rife with fraud.
Hedge funds and medical testing companies are credence goods—we have to trust that their products work.
So we have a sensible suggestion of a pattern to watch out for with the most eye-popping frauds—massive, shockingly fast growth of a company supplying a credence good. The faster and bigger a credence-good company grows, and the more consistent the results or the absence of competition, the likelier the explanation is to be fraud.
P(Fraud|Massive growth & Fast growth & Consistent growth & Credence Good)
Bernie Madoff’s ponzi scheme hedge fund had almost $70 billion (?) in AUM at its peak. Not adjusting for interest, if it existed today, it would be about the 6th biggest hedge fund, roughly tied with Two Sigma Investments.
Madoff’s scheme lasted 17 years, and if it had existed today, it would be the youngest hedge fund on the list by 5 years. Most top-10 hedge funds were founded in the 70s or 80s and are therefore 30-45 years old.
Theranos was a $10 billion company at its peak, which would have made it about the 25th largest healthcare company if it existed today, not adjusting for interest. It achieved that valuation 10 years after it was founded, which a very cursory check suggests it was decades younger than most other companies on the top-10 list.
FTX was valued at $32 billion and was the third-largest crypto exchange by volume at its peak, and was founded just two years before it collapsed. If it was a hedge fund, it would have been on the top-10 list. Its young age unfortunately doesn’t help us much, since crypto is such a young technology, except in that a lot of people regard the crypto space as a whole as being rife with fraud.
Hedge funds and medical testing companies are credence goods—we have to trust that their products work.
So we have a sensible suggestion of a pattern to watch out for with the most eye-popping frauds—massive, shockingly fast growth of a company supplying a credence good. The faster and bigger a credence-good company grows, and the more consistent the results or the absence of competition, the likelier the explanation is to be fraud.