Risk management lessons from madoff fraud

Abstract

In December 2008, as the financial and economic crisis continued on its devastating course, a new scandal erupted. After the 1998s failure of Long-Term Capital Management, Madoff's fraud once again discredits the hedge funds industry. This scandal is, however, of a different kind. Indeed, Madoff's firm 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, due diligence processes, and the use of quantitative replication, regulatory, and standardizing approaches of the hedge fund industry.

Citation

Clauss, P., Roncalli, T. and Weisang, G. (2009), "Risk management lessons from madoff fraud", Choi, J.J. and Papaioannou, M.G. (Ed.) Credit, Currency, or Derivatives: Instruments of Global Financial Stability Or crisis? (International Finance Review, Vol. 10), Emerald Group Publishing Limited, Leeds, pp. 505-543. https://doi.org/10.1108/S1569-3767(2009)0000010019