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.



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.



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

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