Ponzi. Not since the term “hedge fund” was first used has there been such disagreement over financial terminology.  Suddenly, Ponzi schemes are all over the news.  Forbes’ noted last week in a story called “Everything is Coming up Ponzi” that “authorities are bagging mini-Madoffs left and right.“  Last Thursday, the US government took action against two more “Ponzi schemes” (neither starting with an “M”).  One was allegedly perpetrated by an 82 year old man against elderly members of the Catholic community.   And the other was allegedly orchestrated by a Philadelphia man who convinced investors to part ways with $50 million.

So are these two new Ponzi schemes really Ponzi schemes or is the SEC frantically trying to make up for previous lapses to show that they are back on top of things?

“Little Ponzi’s”

If Time Magazine’s Ari Officer is right then finding Ponzi schemes will be like shooting fish in a barrel for the SEC.  In fact, Officer writes that there is actually a Ponzi scheme in every hedge fund.  The reason is that like all investment funds, hedge funds routinely have a lot of unrealized gains and losses.  The extra challenge faced by hedge funds, however, is that the unrealized gains and losses are locked up in less liquid assets.

As a result, writes Officer, hedge funds sometimes need to rely on new investments to pay out old investors.  After all, why would a fund liquidate a position – particularly one that the manager feels is trading at a discount – when the fund already has a whack of new cash from subscriptions.

In fact, a fund doesn’t even have to do anything wrong to fall under Officer’s broad definition of Ponzi scheme:

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