Money Manager Running Away with Money

As long as investors set up their managed account taking certain precautionary measures, it is impossible for a manager to run away with their funds.

The key is for investors to open an account directly with a regulated brokerage firm and only grant the money manager a LIMITED Power of Attorney; that is, an authority over a client's account that's limited to ONLY placing and managing trades – not making withdrawals or deposits. Once this setup is in place, the manager cannot run off with any client money.

Sending Funds Directly to the Portfolio Manager

Even though clients of a hedge fund do have to send their funds directly to the fund, this is unnecessary under a managed account structure. Consequently, clients should never be asked by a manager to send funds to the manager directly. If a portfolio manager insists on this, beware! You might be dealing with either a pyramid or Ponzi scheme a la Madoff. This is typically the case when clients are promised a nearly fixed, daily or monthly return on their money. Money managers who partake in these types of scams need total control of the accounting process and funds to keep their business going. Once the investor opens an account directly with a brokerage firm and sends the broker the money, this becomes impossible for the manager to pull off.

In conclusion, it is impossible for a manager to steal money from investors if the managed account is opened in a standard way via the brokerage firm itself.