Funds Hub

Money managers under the microscope

Spotting Madoff

January 22, 2009

The due diligence, or lack of it, undertaken by investors has been one of the big talking points following the alleged fraud by U.S. financier Bernard Madoff.

 

But according to risk management firm Riskdata, the scandal could potentially have been spotted by (fairly complicated) statistical analysis.

 

rtr23ea9

Basically, this formula can detect the potential ‘smoothing’ of returns and performance manipulation. According to Riskdata, this ratio was at a much higher level in one of Madoff’s feeder funds than the average among equity hedge funds.

 

The second possible warning sign is the Madoff strategies’ risk profiles.

 

Delving into the numbers, according to Riskdata, shows that the risk factors to which Madoff’s strategies were exposed tended to change from month to month – a surprising outcome for a strategy that had such stable returns.

 

Which is of little comfort to those who have already lost out in the Madoff scandal. 

 

But Riskdata is clearly hoping that hedge fund investors now desperately wondering about the fund managers in their portfolios, will come battering down the door for a bit statistical reassurance.

 

Comments

Nothing gets through to this soiled human. Who gave him the freedom to do all of this? we awaits the names bernie.

Posted by Jay Gordon | Report as abusive
 

This is probably the best joke I have heard in a long time. There is no formula to model fraud. A great new book I just read makes this point better than I ever could. It’s called Hedge Fund Operational Due Diligence Understanding the Risks by Jason Scharfman. I suggest that the people at Riskdata check it out…. but then again I’m sure their (fairly complicated) model already told them that.

Posted by Geronji | Report as abusive
 

I guess no model could ever make fraud impossible. But the industry seems to be in agreement that better due diligence is needed. The question is what will this look like?

Posted by Laurence Fletcher | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •