Madoff - EDHEC position paper sets out the red flags that should have served as warning signals | EDHEC Alumni - la communauté de tous les diplômés de l'EDHEC

In a new position paper from the EDHEC Risk and Asset Management Research Centre, François-Serge Lhabitant and Greg Gregoriou, two of academia’s recognised worldwide authorities on hedge funds, have reviewed some of the red flags that any operational due diligence and quantitative analysis should have identified as a concern.

In the report, Madoff: A Riot of Red Flags, the authors highlight some of the salient operational features common to best-of-breed hedge funds, features that were clearly missing from Madoff's operations. Indeed, according to Lhabitant and Gregoriou, the list of due diligence red flags was so long and unsettling that it should have deterred potential investors.

The EDHEC position paper looks at the events leading up to the fraud and considers how the alleged split-strike conversion strategy would have worked before exploring the due diligence aspects of the case in detail.

Among the areas which should have been seen as a concern were both operational red flags (lack of segregation amongst service providers, obscure auditors, an unusual fee structure, heavy family influence, lack of disclosure, insufficient staff, etc.) and investment red flags (black-box strategy, questionable style exposures, incoherent 13F filings, excessive market size).

A copy of the EDHEC position paper Madoff: A Riot of Red Flags, can be downloaded here

Written by STEPHANE COLOMBANI
Date of update February 27, 2009

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Madoff - EDHEC position paper sets out the red flags that should have served as warning signals

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