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February 2009

Risk management: Madoff returns made up

Do end investors, be they feeder funds or funds of hedge funds, or indeed any party offering advice on investing in hedge funds, properly understand the strategies being run? The Madoff case has thrown light on the fact that even the simplest of strategies are clearly not understood by end investors.


Research by risk management firm Riskdata points out that Bernie Madoff clearly stated that his equity hedge fund employed a "split strike conversion". However, a simple replication of that strategy showed that his advertised returns were impossible to achieve. The risk profile of Madoff’s fund was inconsistent with the returns he was...


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