Madoff: A Flock of Red Flags

Abstract

For more than 17 years, Bernard Madoff has operated what was perceived 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 article, the authors review some of the red flags that any operational due diligence and quantitative analysis should have identified as a concern prior to investing, and highlight some of the salient operational features common to best-of-breed hedge funds that were clearly missing from Madoff.

TOPICS: Real assets/alternative investments/private equity, risk management, financial crises and financial market history