Risk Management Lessons from Madoff Fraud
In December 2008, as the nancial and economic crisis continued on its devastating course, a new scandal erupted. After the 1998's failure of Long-Term Capital Management, Madoff's fraud once again discredits the hedge funds industry. This scandal is however of a dierent kind. Indeed, Madoff's rm is not a standard hedge fund but a developed Ponzi scheme. By explaining Madoff's system and exploring the reasons for its collapse, this paper draws risk management lessons from this fraud, especially for operational risk management. Present day risk management processes have partially failed to prevent the Madoff scandal. This paper presents the issues for risk capital requirements raised by the collapse of the Madoff scheme. Implications for due diligence processes, including the use of quantitative replication to assess the credibility of the performance of a hedge fund, are also considered. Finally, consideration is given to the regulatory and standardizing approaches of the hedge fund industry as a response to frauds similar to that of Madoff.
|Date of creation:||02 Mar 2009|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Stephen Brown & William Goetzmann & Bing Liang & Christopher Schwarz, 2008.
"Mandatory Disclosure and Operational Risk: Evidence from Hedge Fund Registration,"
Journal of Finance,
American Finance Association, vol. 63(6), pages 2785-2815, December.
- Stephen Brown & William Goetzmann & Bing Liang & Christopher Schwarz, 2006. "Mandatory Disclosure and Operational Risk: Evidence from Hedge Fund Registration," Yale School of Management Working Papers amz2472, Yale School of Management, revised 11 Sep 2009.
- René M. Stulz, 2007. "Hedge Funds: Past, Present, and Future," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 175-194, Spring.
- Stulz, Rene M., 2007. "Hedge Funds: Past, Present, and Future," Working Paper Series 2007-3, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
- Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-1181, September.
- Bhattacharya, Utpal, 2003. "The optimal design of Ponzi schemes in finite economies," Journal of Financial Intermediation, Elsevier, vol. 12(1), pages 2-24, January.
- Roncalli, Thierry & Weisang, Guillaume, 2011. "Tracking Problems, Hedge Fund Replication, and Alternative Beta," Journal of Financial Transformation, Capco Institute, vol. 31, pages 19-29.
- Roncalli, Thierry & Weisang, Guillaume, 2008. "Tracking problems, hedge fund replication and alternative beta," MPRA Paper 37358, University Library of Munich, Germany.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:36754. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If references are entirely missing, you can add them using this form.