Madoff: A Returns-Based Analysis

Abstract

A fundamental question with regard to the Madoff scandal is whether there were any reasonable means by which typical investors and/or their consultants could have determined that the various investment vehicles by which investors accessedMadoff were in fact not offering what they claimed.While a detailed due diligence analysis of the Madoff infrastructure which included various feeder funds as well as Madoff’s auditing, custodial, and prime brokerage relationships may well have dissuaded investors or their consultants from investing in Madoff, most individual investors have neither the financial resources nor the skill to conduct such an analysis. For the most part, investors depend on the various funds and/or consultants to conduct adequate due diligence.Ex post, it is obvious that many such funds or consultants did not adequately conduct such analyses. In this article the authors examine a number of empirical characteristics derived from return streams of severalMadoff feeder funds whose return data were available in various databases.Results show that potential problems were evident in the footprint of the returns, but unfortunately those footprints were well hidden.