The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies before using this site. Please see our Subscription Terms and Conditions.

All material subject to strictly enforced copyright laws. © 2022 Euromoney, a part of the Euromoney Institutional Investor PLC.

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 claiming to make.

"Suspiciously, the only way to replicate Mr Madoff’s performance is to invest in his funds!"


When you look back, say the authors of Riskdata’s Madoff case research, long/short equity hedge funds that reported data to HFR can be divided into two distinct buckets: funds whose risk profile is close to that of Madoff, and all the others. "Most of the funds close to Madoff’s risk profile were either directly managed by Madoff, or feeders of his funds," says the report. "Moreover this group are all extremely highly correlated with each other – typically above 95% correlation. Suspiciously, the only way to replicate Mr Madoff’s performance is to invest in his funds!" Some investors had tried to replicate Madoff’s strategy and when large discrepancies between his stated returns and their mimicked returns arose, they did not invest, says Riskdata.

You have reached premium content. Please log in to continue reading.

Read beyond the headlines with Euromoney

For over 50 years, our readers have looked to Euromoney to stay informed about the issues that matter in the international banking and financial markets. Find out more about our different levels of access below.


Unlimited access to and

Expert comment, long reads and in-depth analysis interviews with senior finance professionals

Access the results of our market-leading annual surveys across core financial services

Access the results of our annual awards, including the world-renowned Awards for Excellence

Your print copy of Euromoney magazine delivered monthly

£73.75 per month

Billed Annually


Unlimited access to and, including our top stories, long reads, expert analysis, and the results of our annual surveys and awards

Sign up to any of our newsletters, curated by our editors


Already a user?

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree