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I had not heard that name, you may not have too until he did this. What is so interesting about?him is that he unlike many firms that screw?small people with these ponzi schemes managed to screw the biggest and some of the best including firms like Nomura, BNP Paribas among others.

What?s more surprising is that this scheme was not run for a few days or a few months but instead lasted years together with not many picking up even a whiff of a scam. That?s very surprising to say the least because Hedge Funds / Big HNI’s have dedicated persons for Risk Management and a sustained month after month positive market with very low volatility is just no possible.

Most of them will now claim to be misled, but the fact would remain that they were Greedy when they should have been fearful (yeah, yeah, you have heard that before ). There is never a strategy that can give you sustained positive performance day after day, month after month and year after year.

This is because, every strategy has its time limits. If a strategy is yielding freebies, it will provide the returns until a lot more money uses the same strategy / technique at which point, risk outmatches return.

The Madoff strategy was simple in itself. He claimed to use what he called and I quote “A split-strike conversion strategy using proprietary ‘black box’ quantitative techniques to minimize portfolio volatility?. What he was actually trading was using simple Collar Strategy where returns are good when Volatility is low and Trend is Bullish. Once trend starts being a bear, you can hardly make money in this strategy since your stocks will fall more than what your Sold Call Option can sustain and hence giving negative returns. Infact, most of the time, unless a bit of bias is taken {By way of selling a Deep Out of the money Calls to ensure more gains when stock moves up or purchasing Deep Out of the Money Puts to ensure small investment in the Put Options}.

What can we conclude from above? Well, there is no Holy Grail and if something is not believable, it may not be true in itself as well.

Take Care

Prashanth

Tags: Risk Management, Scam

This entry was posted on Monday, December 15th, 2008 at 2:13 am and is filed under News & Views. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.