Friday, December 19, 2008

Deconstructing Madoff

Lots of people have asked me how the Madoff Pozni scheme actually worked. From what a hedge fund is, to what a fund of funds is, to the options strategies he used, most people don't really understand what was happening.

According to Bloomberg, the whole thing had been masterfully simplified, because there is no way he was actually doing those options trades. He might have been doing little more than typing up fake statements. I want to know who was in the meeting when he was drawing up that strategy. "OK guys, I have worked for years to devise the perfect, risk-free investment strategy and it is impossible, so what do you say we pretend to have one? Sound good?"

Dec. 19 (Bloomberg) -- The options trading strategy Bernard Madoff said he used to help produce profits for 17 straight years would have required at least 10 times the contracts that trade on U.S. exchanges.

“It was never done,” Michael Schwartz, chief options strategist at Oppenheimer & Co. in New York and a trader since 1965, said of the strategy. “If he did it on an exchange, we would have heard about it, and if he did it over the counter, the person he bought it from would have hedged it on an exchange.”

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