NEW YORK (Reuters) - Investors scrambled to assess potential losses from an alleged $50 billion fraud by Bernard Madoff, a day after the arrest of the prominent Wall Street trader.

Prosecutors and regulators accused the 70-year-old former chairman of the Nasdaq Stock Market of masterminding a Ponzi scheme of epic proportions through a hedge fund he ran. Hundreds of people, investing with him through the fund's clients, entrusted Madoff with billions of dollars, industry experts said.

"Madoff's investors included captains of industry, corporations (some of which are publicly traded) that used Madoff almost as a high-yielding cash management account, endowments, universities, foundations and, importantly, many high-profile funds of funds," said Douglas Kass, who heads hedge fund Seabreeze Partners Management.

"It appears that at least $15 billion of wealth, much of which was concentrated in Southern Florida and New York City, has gone to 'money heaven,'" he added.

Federal agents arrested Madoff at his apartment on Thursday after prosecutors said he told senior employees that his money management operations were "all just one big lie" and "basically, a giant Ponzi scheme".

Madoff is the founder of Bernard L. Madoff Investment Securities LLC, a market-making firm he launched in 1960. His separate investment advisory business had $17.1 billion of assets under management.

About a dozen angry investors gathered yesterday in the lobby of the Lipstick Building in midtown Manhattan, where the market-making firm and advisory fund are both headquartered, demanding to know the fate of their money.

One woman who declined to give her name said that when she called the firm's offices on Thursday she was told it was "business as usual".

Another investor groused, "Business as usual? Of course it's business as usual. We're getting screwed left and right."

Police later evicted the small group from the building.

The two most prominent hedge funds that invested with Madoff were the $7.3 billion Fairfield Sentry Ltd, run by Walter Noel's Fairfield Greenwich Group, and the $2.8 billion Kingate Global Fund Ltd, run by Kingate Management Ltd. and based in Bermuda.

Kingate promised a statement yesterday, but it had not arrived by press time.

Fairfield Sentry and Kingate Global were among a small group of hedge funds to report positive returns for 2008; the average hedge fund was down 18 percent, according to data from Hedge Fund Research.

"People who came to us for portfolio construction were often already invested with Bernie Madoff, he had hundreds of clients," said Charles Gradante, who invests in hedge funds as a principal at Hennessee Group LLC. "Now his whole legacy is destroyed. He was God to people."

In a Ponzi scheme, a swindler uses money from new investors, who are lured with the promise of high or consistent returns, to pay off earlier investors.

Prior to Madoff's arrest, investors had wondered how he was able to generate annual returns in the low double digits in a variety of market environments. Many questioned how US regulators were able to ignore numerous red flags with regards to Madoff's fund.

"Many of us questioned how that strategy could generate those kinds of returns so consistently," said Jon Najarian, an options trader who knows Madoff and is a co-founder of optionmonster.com.

In May 2001, Barron's reported that option strategists for major investment banks said they couldn't understand how Madoff managed to generate the returns that he did.

"We weren't comfortable with Madoff," said Brad Alford, president at investment adviser Alpha Capital in Atlanta. "We didn't understand how his strategy could generate the kind of returns it did. We will walk away from things like that."

US stocks tumbled in early trading Friday, with some investors citing the Madoff case as well as the failure of talks in Congress on a rescue for the US auto industry. The market later staged a limited rebound.

Investors overseas were also reeling from the alleged fraud.

Benedict Hentsch, a Swiss private bank, said it had 56 million Swiss francs ($47 million) of exposure to Madoff's investment advisory business. UniCredit SpA's fund management unit, Pioneer Investments, has exposure through its Primeo Select hedge fund, two people familiar with the matter said.