Abstract

http://ssrn.com/abstract=1358086
 
 

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Risk Management Lessons from Madoff Fraud


Pierre Clauss


Ecole Nationale de la Statistique et de l'Analyse de l'Information (ENSAI); National Institute of Statistics and Economic Studies (INSEE) - Laboratory of Statistical Modeling

Thierry Roncalli


Lyxor Asset Management

Guillaume Weisang


Clark University - Graduate School of Management

March 12, 2009


Abstract:     
In December 2008, as the financial and economic crisis continued on its devastating course, a new scandal bursts. After the 1998's failure of Long-Term Capital Management, Madoff's fraud brings once again the discredit on the hedge funds industry. This one is however of a different kind. Indeed, Madoff's firm is not a standard hedge fund but a developed Ponzi scheme. By explaining Madoff's system and exploring the reasons to its collapse, this paper draws risk management lessons from this fraud, especially for operational risk management. Risk management rules as applied nowadays partially failed to prevent Madoff's scandal. This paper presents the issues for risk capital requirements raised by Madoff collapse. Implications for due diligence processes, including the use of quantitative replication to assess hedge fund performance's credibility, are also considered. Finally, consideration is given to the regulatory and standardizing approaches of the hedge fund industry as an answer to frauds of Madoff's kind.

Number of Pages in PDF File: 39

Keywords: Madoff fraud, Ponzi scheme, operational risk, due diligence, supervision, hedge funds, bull spread strategy, split strike conversion

JEL Classification: G1, G3

working papers series


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Date posted: March 18, 2009 ; Last revised: April 8, 2009

Suggested Citation

Clauss, Pierre and Roncalli, Thierry and Weisang, Guillaume, Risk Management Lessons from Madoff Fraud (March 12, 2009). Available at SSRN: http://ssrn.com/abstract=1358086 or http://dx.doi.org/10.2139/ssrn.1358086

Contact Information

Pierre Clauss
Ecole Nationale de la Statistique et de l'Analyse de l'Information (ENSAI) ( email )
Rennes Metropole - Campus de Ker Lann
Rue Blaise Pascal
BP 37203- 35172 BRUZ Cedex
France
National Institute of Statistics and Economic Studies (INSEE) - Laboratory of Statistical Modeling ( email )
France
Thierry Roncalli
Lyxor Asset Management ( email )
Paris
France
Guillaume Weisang (Contact Author)
Clark University - Graduate School of Management ( email )
950 Main Street
Worcester, MA 01610
United States
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