Money managers under the microscope
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.