Ethics and governance in the European Financial centers

In an excellent report François-Serge Lhabitant and Greg Gregoriou, from the Edhec Risk and Asset Management Research Centre, highlight some of the salient operational features common to best-of-breed hedge funds - features that were clearly missing from Madoff's operations.
The Edhec position paper looks at the events leading up to the fraud and considers how the alleged split-strike conversion strategy would have worked before exploring the due diligence aspects of the case in detail.
Among the areas which should have been seen as a concern, the authors say, were operational red flags and investment red flags

Operational red flags were :
- lack of segregation amongst service providers,
- obscure auditors,
- an unusual fee structure,
- heavy family influence,
- lack of disclosure,
- insufficient staff,

Investment red flags were :
- black-box strategy,
- questionable style exposures,
- incoherent 13F filings,
- excessive market size.



Most of the identified operational red flags are definitely met in luxembourg :
- lack of segregation amongst service providers,
- obscure auditors,
- heavy family influence,
- lack of disclosure,
- insufficient staff.


Read paper