This is the conclusion of the preliminary investigation by two professors at Edhec business school into the warning signs that investors in Bernard Madoff’s alleged Ponzi scheme missed. “The reality is that the warning signals were there and the salient operational features common to best-of-breed hedge funds were missing”.
The most interesting part of the study is the analysis of the results that one of the feeder funds which channelled into Madoff’s investment strategy reported to its investors. Over the seventeen years of this fund’s operation, it delivered an impressive track total return of 557%, with not one single down year and fewer than 5% negative months.
Anyone with a simple spreadsheet could have worked out that the volatility of these returns was absurdly low, 2.5% p.a compared with the S&P 100 index’s 14.8% p.a over the same period. The maximum drawdown was 0.6% p.a for the Madoff fund and 49.1% for the stock market index. The S&P 100m index was the one that Madoff claimed to be adopting his split-strike conversion strategy over.
As always, the wonder in such cases is that so-called professionals can be so easily confounded by the lack of even the simplest statistical analysis. If press reports are to be believed, the evidence emerging from the investigations into Madoff’s operation suggests that he made no investments at all in securities for at least 13 years (and it may turn to have been even longer).
Jonathan Davis 