Your money vs. other’s

The SEC analysis of its bungling of the  Madoff matter is producing lots of interesting tidbits, including the fact that Renaissance Technologies grew suspicious of Madoff back in 2003 and eventually pulled its investments from him.

[....] Henry Laufer, Renaissance’s chief scientist, expressed amazement at Mr. Madoff’s ability to exit the market, selling its investments and holding primarily cash in a way that consistently staved off losses other investment firms suffered.

The timing of the moves, Mr. Laufer said, was almost statistically impossible. Mr. Laufer told the SEC in testimony earlier this year that “we would have loved to figure out how he did it so we could do it ourselves.”

He added: “And so that was very suspicious.”

Renaissance didn’t pull its Madoff investments immediately, according to the report. Nathaniel Simons told regulators that one reason was that the firm believed the SEC had closely examined Mr. Madoff’s investments, and that regulators could readily perform the same analysis Renaissance did of Mr. Madoff’s trading strategy.

“[Y]ou just assume that someone was paying attention to make sure that there was something on the other side of the trade,” the younger Mr. Simons told the SEC.

“We did feel that despite the fact that we’re kind of smart people, we were just looking at matters of public record,” he said, according to testimony in the report.

However, Renaissance’s discomfort with Mr. Madoff became greater, prompting the firm to withdraw money from the investments, people familiar with the matter said. Earlier this decade James Simons urged investors he knew also to withdraw, they said.

Renaissance employees expressed dismay to the SEC’s watchdog unit this year that regulators hadn’t unearthed Mr. Madoff’s fraudulent trades. “This is not rocket science,” Mr. Laufer told the inspector general’s office, according to Friday’s report. He added that an SEC examiner could “wander down, you know, to Goldman Sachs and wander over to their options department and ask them, how does somebody execute $10 billion of options, and find out it’s very difficult.”

So where was Walter Noel during this period? He and Andres were selling up a storm, pulling friends into the Madoff vortex not warning them away as Mr. Simons did. Why? I suggest that Simons wasn’t running a fund feeder, so he couldn’t pocket 20% of the illusory profits Madoff was claiming. And that affected his judgment.

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2 responses to “Your money vs. other’s

  1. Anonymous

    Smart quants are adept at math and arb strategies but often struggle with basic business/character judgment (or common sense)

  2. Anonymous

    Can’t con an honest man.

    I suggest that before compensation is awarded, examinations are conducted of the recipients expectations, and their perceptions of the apparent investments made on their behalf.