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Research employed too few staff to handle the number of transactions Madoff's operation would require. They note that Madoff's reported trading strat- egy was also baffling. He explained that he converted holdings to cash each quarter to avoid disclosure with the SEC—and yet, there was no evi- dence of such large transactions. Another red flag: The auditor of The Fallout from Bernie Madoff Hedge funds have been under tight scrutiny since Bernard Madoff was accused of using his fund to front a $50 billion Ponzi scheme. Two recent papers from EDHEC Business School in France take a closer look at hedge funds and the Madoff scandal. One surveys the industry's perceptions of hedge fund reporting. Another details the red flags that should have sounded alarms about Madoff's fund—but didn't. In the summer of 2008, the EDHEC Hedge Fund Reporting Survey questioned 214 people who managed or invested in hedge funds. The researchers found that 80 per- cent of respondents felt liquidity risk was not sufficiently captured in hedge fund reporting. Most also said that a key signal of a hedge fund's excel- lence is the quality of its reporting. The survey also found that inves- tors desire even more disclosure than fund managers think they do. Managers said that they believe investors most value information on risk-adjusted returns. Investors, however, rated this information least 52 BizEd MAY/JUNE 2009 important—instead, they stressed the relevance of information about extreme risk and past returns. Felix Goltz and David Schroeder of the EDHEC Risk and Asset Man- agement Research Centre conducted the survey. They write that fund managers "use many risk and perfor- mance measures without disclosing them to investors, believing that their investors are uninterested in these additional indicators." This kind of nondisclosure, they add, "is an obsta- cle to hedge fund investment." The authors of a second paper, "Madoff: A Riot of Red Flags," suggest that a lack of proper dis- closure wasn't the only reason Madoff was able to run his Ponzi scheme for decades. François-Serge Lhabitant, associate professor at EDHEC, and Greg Gregoriou, finance professor at State University of New York at Plattsburgh, note that investors let Madoff's reputa- tion overshadow their need for due diligence. As a result, they missed obvious signs of wrongdoing. Lhabitant and Gregoriou write that the fund lacked third-party oversight, had too many fam- ily members in top positions, and Madoff's fund was listed as Friehling and Horowitz, an obscure three- person firm operating from a 550-square-foot office in New York City. If the idea of such a tiny firm auditing a multibillion-dollar hedge fund wasn't enough to arouse suspicions, another fact certainly should have. Every year since 1993, Friehling and Horowitz reported to the American Institute of Certified Public Accountants that it had conducted no audits. Lhabitant and Gregoriou write that the collapse of Madoff's fund "should serve as a reminder that the reputation and track record of a manager, no matter how lengthy or impressive, cannot be the sole justifi- cation for investment." Both papers are available online at www.edhec.edu under the site's research publications section. The Pitfalls of Frequent Trading If some investors haven't learned that frequent stock trades hurt returns, a recent study might hit the point home. It shows that individual Tai- wanese investors collectively lost $32 billion in the stock market between 1995 and 1999, largely due to fre- quent trading. The study was conducted by Brad Barber of the Graduate School of Management at the University TIMOTHY A. CLARY/AFP/GETTY IMAGES