NEW YORK, USA - Bernard Madoff, who has been arrested and charged with operating a long-running Ponzi scheme, has single-handedly turned an already very bad year for hedge funds into a catastrophe.

Now the industry's already steep losses may grow even larger, dozens of funds face collapse, and confidence may become eroded even more - all this after the 70-year-old New York-based investor allegedly cheated investors worldwide of as much as US$50 billion (S$74.5 billion).

'You already have a crisis of confidence because of the falling stock market,' said Mr Charles Gradante, who selects hedge funds for clients as a co-founder of the Hennessee Group.

'Now that crisis has broadened to hedge funds directly because Bernie Madoff seems to have pulled off a gigantic fraud for so many years.'

Panicked hedge fund investors hearing tales of how Madoff cheated his clients might worry that they cannot trust their own managers, said investors and industry lawyers.

The US$1.5 trillion hedge fund industry has been flooded with redemption notices for months as investors react to its deepest ever losses of 18 per cent. Indeed, the panic will likely spread into next year.

'Anyone on the fence regarding redemptions to the fund industry over the next several months will likely put in their requests for capital withdrawal, as confidence in the system and in investment managers has been irreparably impaired,' said Mr Doug Kass, who runs hedge fund Seabreeze Partners Management.

For years, Madoff played the part of a solid investment manager by boasting on his website about his firm's 'unblemished record of value, fair-dealing and high ethical standards'.

His office was filled with computer banks, there was little paper, and he reflected the industry's reputation for secrecy by telling would-be investors very little about how he worked, people who know him remembered.

'Madoff's outfit was such a black box,' said Mr Salomon Konig, chief investment officer at Artemis Capital Partners, who helps endowments and wealthy families select hedge funds.

Mr Konig was so worried that he told funds of hedge funds that he was not keen on doing business with them if they were involved with Madoff.

But plenty of other investors were less careful and downright eager to invest with Madoff, whose records showed that he lost money in only five of 156 months, several people familiar with his clientele said.

Tremont Capital was an early fan, they said. Also hedge funds Fairfield Sentry and Kingate Global Fund were known as feeder funds for Madoff. And Spanish group BBVA had offered United States-based advisers a chance to put their clients' money in his hands.

As the list of people linked with Madoff grows, industry experts believe the pain will be felt far and wide.

Already, rumours are swirling about funds that will be wiped out by the alleged fraud.

Another major result from the Madoff case will be an increase in hedge fund surveillance.

'A lot of people treat due diligence as a check-the-box kind of endeavour and this is a poster-child case for why you need to do real due diligence,' said Mr Peter Turecek, a managing director at Kroll, a risk consultancy owned by Marsh & McLennan Companies.

EXPECT MORE REDEMPTIONS

'Anyone on the fence regarding redemptions to the fund industry over the next several months will likely put in their requests for capital withdrawal, as confidence in the system and in investment managers has been irreparably impaired.'
Mr Doug Kass, who runs hedge fund Seabreeze Partners Management