After landing at Vienna International Airport last Friday, my colleague and good friend at an Austrian private bank informed me of the Bernie Madoff hedge fund scandal. I was truly shocked and, thereafter, disgusted.

Approximately $50 billion dollars has been lost in the biggest hedge fund scam in history. Though it’s still too early to ascertain exactly how much, if any, investor capital will be recovered, the odds are pretty high most Madoff investors won’t see a nickel.

How can someone knowingly rip-off his investors, including his own son, friends and large international investors year after year without any remorse, no shame? This is truly unbelievable.

How can Bernie Madoff live with himself?

The damage done by this scandal will add even more insult to injury to hedge funds. The industry is now suffering its worst public relations disaster since the Bernie Kornfeld IOS scam in the early 1970s. Hedge funds are estimated to have lost about one-third of their total assets in 2008 and now, more investors will probably run for the exits because the investment community has been shattered by a huge fraud.

Madoff ran several offshore and domestic hedge funds specializing in something called “option arbitrage,” a strategy I barely understand yet alone would attempt to trade. Big institutional investors in Switzerland, Austria, Israel and elsewhere have suffered major losses following revelations last Thursday by Madoff that his entire hedge fund business was “one big lie.”

A classic Ponzi scheme, Madoff Securities would raise capital from new investors and then pay existing investors who redeemed. It was a massive gamble that worked for more than ten years producing low volatility returns while rarely recording a losing month. Investors with Madoff earned about 10% per annum in his hedge funds.

The jig was up for Madoff starting in November when a rash of redemptions overwhelmed his business or Ponzi model; many top performing hedge funds this year have unfortunately been victimized by a global liquidity crunch, including Madoff.

I actually reviewed one of Madoff’s prospectuses about three years ago. I was initially lured by his consistent returns; but after reading the prospectus, I determined that I didn’t understand his strategy and decided not to invest.

If you don’t understand an investment strategy, no matter how seemingly spectacular the returns, then avoid it. Yet amazingly, some very smart investors, including several I know personally have now lost millions with Madoff.

In the end, institutional and individual investors alike failed to conduct their own due diligence on Madoff Securities. Perhaps it would not have made a difference anyway.

I make it a point to travel and meet my advisors, conduct rigorous due diligence and ensure that I truly understand the investment strategy. If not, it’s see ya later. I also look to see how a prospective manager performed amid market carnage or big systemic-induced declines; if a manager consistently makes money under extreme market volatility then you’ve got to wonder what strategy can produce that sort of alpha or absolute return. This was the case with Madoff.

Still, you’ve got to wonder what Chris Cox at the Securities and Exchange Commission (SEC) does at work every day. This guy is a joke.

Regulators last performed a review of Madoff Securities in 2006; what were these guys doing at the SEC? It’s unimaginable that the nation’s regulator didn’t catch this fraud, especially considering that Madoff was overseeing $50 billion in assets.

As a side note, Madoff did make regular political contributions to several parties. I’m not sure what role, if any, this played in lax oversight.

The first thing I would do if I was president-elect Obama in January is purge the SEC. Cox must be fired. The SEC is totally out of control, with no oversight and in my book, gets a massive “F” for failing to properly regulate the entire securities industry.