Lock up your money.

The architect of the Long-Term Capital Management disaster, John Meriwether, is starting a new hedge fund, fresh off the collapse of his latest fund.

He closed JWM Partners three months ago after the fund lost 44% of its value during the financial crisis.

In 1991, John Meriwether lost his job at Salomon Brothers in the wake of a government bond scandal; he then proceeded to open up his own hedge fund: Long-Term Capital Management. After the collapse of that fund nearly torpedoed the entire global economy -- and was chronicled in the highly readable When Genius Failed -- Meriwether has gone through a string of less notable ventures.

His latest is now coming to an end. Bloomberg reports that "JWM Partners LLC is closing its main Relative Value Opportunity II fund after losing 44% from September 2007 to February 2009."

It's hard to have much sympathy for the investors who lost their money putting their faith in the mastermind of one of the biggest disasters in the history of global finance, although he was more conservative this time around: The Relative Value Opportunity II fund was leveraged just 15 to 1 instead of the more than 25 to 1 that led to the demise of Long-Term Capital. This time though, Meriwether's fund was a victim of market problems instead of a cause of them.

Ever since the $50 billion Madoff Securities Ponzi scheme came to light, I have been wondering whether there are others out there that have yet to be discovered. While the facts of how Madoff was able to keep his scheme going remain elusive, it appears that a recent $7 billion cash call made it clear that he did not have enough cash on hand. If Madoff was indeed a Ponzi scheme, he would have needed to raise $7 billion from new investors to meet those redemption requests -- since he could not raise that much new money he folded his hand.

It is hard to believe that Madoff is the only scam artist out there. Why was Madoff able to pull it off for so long? Are there other funds with similar characteristics? Is James Simons' $35.4 billion (October 2007 assets under management) Renaissance Technologies such a fund? The answer to the last question is that it's possible but unlikely.

Since enough is not yet known about where Madoff's money came from and where it went, we don't know how he pulled it off. But, as I posted, there are four key elements that probably contributed:

• Unrealistically steady returns that others could not duplicate. Madoff reported 1% a month returns through a split conversion strategy that others could not duplicate but that investors wanted to believe was real;
• Lack of independent auditing. Madoff had a three-person audit firm -- one of whose members was a 78-year- old living in Florida;

According to this weekend's Wall Street Journal, the rich are "bailing out" of hedge funds. Says Robert Frank, "In 2005, the world's financial millionaires (those with investable assets of $1 million or more, not including primary residence) had 20% of their investments in alternatives. In 2006, they cut that exposure in half, to 10%."

Of course, everyone is speculating about what it all means. Are the days of big returns from hedge funds over? Are we approaching a credit crisis, or another Long-Term Capital Management-style blow-up that will threaten the liquidity of the capital markets?

Here's another possibility that may be part of the explanation: Maybe astute, wealthy investors are realizing that hedge funds can't, on average, generate returns strong enough to justify the "2 and 20" compensation plans that make even mediocre managers exceedingly wealthy.

If scholars like Burton Malkiel are even close to being right about the efficiency of markets, hedge funds are a bad deal.

In a new book discussed in today's Wall Street Journal, hedge fund manager and derivatives pioneer Richard Bookstaber warns of the potential for disaster created by modern markets and derivatives (which Warren Buffett referred to as financial WMDs): "The financial markets that we have constructed are now so complex, and the speed of transactions so fast that apparently isolated actions and even minor events can have catastrophic consequences."

In the book, Bookstaber admits to playing a role in the market crash of 1987 and the collapse of hedge fund Long-Term Capital Management (For an amazing book on that fiasco, check out When Genius Failed: The Rise and Fall of Long-Term Capital Management).

Of course, the financial establishment disagrees with Bookstaber's argument. But what else are they going to say? "Yes, the products we've been creating and trading and getting rich from are very likely to cause a disaster." It reminds me of another Warren Buffett witticism: "Never ask a barber if you need a haircut."

I'll be ordering a copy of this book tonight and I'll let you know what I think of it.