Research and publications

Madoff: A Riot of Red Flags

For more than seventeen years, Bernard Madoff operated what was viewed as one of the most successful investment strategies in the world. This strategy ultimately collapsed in December 2008 in what financial experts are calling one of the most detrimental Ponzi schemes in history. Many large and otherwise sophisticated bankers, hedge funds, and funds of funds have been hit by his alleged fraud. In this paper, we review some of the red flags that any operational due diligence and quantitative analysis should have identified as a concern before investing. We highlight some of the salient operational features common to best-of-breed hedge funds, features that were clearly missing from Madoff’s operations. A revisited version of this paper was published in the Summer 2009 issue of The Journal of Wealth Management.

Author(s):

Greg N. Gregoriou, François-Serge Lhabitant

Summary:

For more than seventeen years, Bernard Madoff operated what was viewed as one of the most successful investment strategies in the world. This strategy ultimately collapsed in December 2008 in what financial experts are calling one of the most detrimental Ponzi schemes in history. Many large and otherwise sophisticated bankers, hedge funds, and funds of funds have been hit by his alleged fraud. In this paper, we review some of the red flags that any operational due diligence and quantitative analysis should have identified as a concern before investing. We highlight some of the salient operational features common to best-of-breed hedge funds, features that were clearly missing from Madoff’s operations. A revisited version of this paper was published in the Summer 2009 issue of The Journal of Wealth Management.

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Type :	EDHEC Publication
Date :	02/09/2009
Keywords :	Alternative Investments

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