Abstract
It is now known that the very impressive investment returns generated by Bernie Madoff were based on a sophisticated Ponzi scheme. Madoff claimed to use a split-strike conversion strategy. This strategy consists of a long equity position plus a long put and a short call. In this paper we examine Madoff's returns and compare his investment performance with what could have been obtained using the split-strike conversion strategy based on the historical data. We also analyze the split-strike strategy in general and derive expressions for the expected return, standard deviation, Sharpe ratio and correlation with the market of this strategy. We find that the Madoff's returns lie well outside their theoretical bounds and should have raised suspicions about Madoff's performance.
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