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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

Both Free and Paid recommendations in the stock market are available in large numbers. But how many really make trading / investment sense.

As a example, I am taking up this weeks recommendation in Business Line for Nifty.? Near month Nifty Futures closed on Friday @ 2921. Assuming we open at 3000, as per reco, the strategy is to go short with a Stop Loss of 3250. Now, 3250 is 250 points away and we are talking about Nifty which is a leveraged product. Hence the risk in One Contract (50 Lot Size) Rs.12,500.00.

Theoretically, it does not appear large. But thats because we arent calculating the risk with regard to our Capital but instead looking at it only by way of figures.

Money?Management theory says that risk as a percentage should not exceed 2% (if you go by Tharp) or the more generally accepted range of 0.50% of capital to 1.00% of capital.

If we check out the risk?in relation to the above percentages, we?can find that at the highest risk, our Capital should be Rs.6,25,000.00 and at the lowest end, it comes to Rs25,00,000.00 and I am?speaking of One?Nifty Lot.

While No Targets have been provided, lets take the supports that are being given.

Immediate support at around 2750: Profit Margin: 250 Points (1:1 Risk-Reward ratio)

Big crucial support at 2450: Profit Margin: 550 Points (1:2.2 RR Ratio)

Ultimate Suport @ 1880-1950: Profit Margin: 1050 Points (1:4.2 RR Ratio)

While the RR ratio in itself appear satisfactory, it has to be noted that good RR ratio in itself does not mean anything. What we also have to look into is the Return on Equity since that our next main concern (Concern One being Capital Protection)

Immediate support gives us a return of 2% (2% of Equity Stop) and 0.50% (if 0.50% Equity Stop is applied).

Since this is a weekly article and assuming markets does manage to either stop out our positions or provide us the profit oppurtunity, the returns are not that?bad considering the Volatility that exists in the current market. Its just?that our Equity should be able to support venturing into?such a High Risk - High Gain strategy.

Thats it for now

Prashanth