Suspicious 2001 Interview with Madoff
We have often heard that there were a good many financial professionals who were suspicious of Madoff's hedge fund, based on the low volatility and almost complete lack of a month with negative returns. However, in an interview Madoff gave in 2001, there were many clues, certainly in retrospect, that something was amiss.
Here are a few quotes from that article by MarHedge in May of 2001 that are certainly interesting in hindsight:
"Those who question the consistency of the returns, though not necessarily the ability to generate the gross and net returns reported, include current and former traders, other money managers, consultants, quantitative analysts and fund-of-funds executives, many of whom are familiar with the so-called splitstrike conversion strategy used to manage the assets."
"What is striking to most observers is not so much the annual returns—which, though consider somewhat high for the strategy, could be attributed to the firm’s market making and trade execution capabilities—but the ability to provide such smooth returns with so little volatility."
"The best known entity using a similar strategy, a publicly traded mutual fund dating from 1978 called Gateway, has experienced far greater volatility and lower returns during the same period."
"And in a face-to-face interview and several telephone interviews, Madoff sounds and appears genuinely amused by the interest and attention aimed at an asset management strategy designed to generate conservative, low risk returns that he notes are nowhere near the top results of well-known fund managers on an absolute return basis."
"The apparent lack of volatility in the performance of the fund, Madoff says, is an illusion based on a review of the monthly and annual returns. On an intraday, intraweek and intramonth basis, he says, 'the volatility is all over the place,' with the fund down by as much as 1%."
"But as whole, the split-strike conversion strategy is designed to work best in bull markets and, Madoff points out, until recently 'we’ve really been in a bull market since ‘82, so this has been a good period to do this kind of stuff.'"
"As for the specifics of how the firm manages risk and limits the market impact of moving so much capital in and out of positions, Madoff responds first by saying, 'I’m not interested in educating the world on our strategy, and I won’t get into the nuances of how we manage risk.'"
"He won’t reveal how much capital is required to be deployed at any given time to maintain the strategy’s return characteristics, but does say that 'the goal is to be 100% invested.”
"Indeed, says Madoff, the firm itself has received numerous buyout offers but has so far refused any entreaties because he and the many members of his immediate and extended family who work there continue to enjoy what they do and the independence it allows and have no desire to work for someone else."
"Similarly, he adds, another firm could duplicate the strategy in an attempt to get similar results, but its returns would likely be unmatched because 'you need the physical plant and a large operation' to do it with equal success. However, many Wall Street firms, he says, do use the strategy in their proprietary trading activities, but they don’t devote more capital to such operations because their return on capital is better used in other operations."
"Madoff, who believes that he deserves 'some credibility as a trader for 40 years,” says: “The strategy is the strategy and the returns are the returns.' He suggests that those who believe there is something more to it and seeking an answer beyond that are wasting their time."
Those are chilling quotes knowing what we do now.
Read the full article here