In the fallout of the Madoff affair, some of the biggest losers will be the fund of hedge funds industry (FoHFs).  Experts are speculating that significant assets will be withdrawn over the next year.  Pre-Madoff figures charge the FoHFs industry as managing roughly half of cumulative assets invested in hedge fund vehicles.  The industry grew rapidly over the past decade as the global investment community sought trusted advisors to help access the historically extraordinary performance which alternative strategies were producing.  Seeking insight into the close knit and often nebulous world of hedge fund investing, pensions, endowments, private wealth managers and other institutional investors increasingly entrusted FoHF managers to prudently allocate their assets with proven hedge funds. 

Due diligence was a pillar of the value proposition of this growing industry.  In a damning anecdote for the industry, the Madoff scandal has shown FoHFs who neglected this principle task and invested heavily and, in some instances, wholeheartedly with Madoff.  This displays an obvious absence of due diligence and seriously flawed judgement on the part of these managers.  Consequently, this carries the unfortunate consequence for the rest of the FoHF community who did their diligence and steered clear of Madoff's enticing 'track record.'  For those who resisted the forbidden fruit of unfathomably smooth return streams, now is the time to communicate proactively.  FoHF managers must take the time now to clearly communicate to both existing investors - to prevent withdrawal requests -  and the investment community at large - to exhibit the benefits of diligence and re-establish the raison d'etre of the industry.  The times are too crucial for those who followed their mission statements to miss this opprortunity.