Quote from rwk:
I understand that without analyzing the trader's positions, you cannot tell if he is taking fooled-by-randomness type risks, such as selling options naked. But if I had been doing stat arb in the glory days, I am not sure I would have been talking about it in a forum such as this. When we find something good, real traders tend to keep it to ourselves.
Risk is part of the business. That's why you start with small allocations. It's the traders job to manage that risk, and I am not sure you can tell all that much about his risk control just by looking at his portfolio. A trader can go broke without ever taking a career-ending hit.
Fraud is different (and real) problem. I think cooking the books was a much more important part of Madoff's fraud than was failing to disclose his methodology. There are ways to finesse that even with tamper-resistent record-keeping. For example, one could have multiple accounts with offsetting strategies and only show the ones that make money.
