According to one report "Madoff claimed to be moving as much as $13 billion in and out of the market every month"
That's not exactly peanuts, but IWM is an ETIF (Exchange Traded Index Fund) so nobody is watching its internal workings like they would a regular, for real, company. Moving $39 billion in one day would certainly give a wheeler dealer like Madoff cover for whatever he wanted.
I think Madoff took advantage of a half dozen ETIFs to simply swap stuff back and forth on a fairly regular basis to "trick" potential investors into thinking he was constantly buying low and selling high.
Parrondo's paradox may have played a part in this since he'd need to win something in order to pay brokerage and exchange fees. If so, it wasn't winning him enough to make the profits he'd anticipated.
It won't surprise me a bit to see IWM and NY listed in his preferred stocks list.
It won't surprise me a bit to see IWM and NY listed in his preferred stocks list.
You are correct in your assumptions of Madoff's trading S&P and its ETFs and Parrondo's paradox, trying to capture low margin of covered call writing with put collar spread strategy which was basically forced by having to move massive amounts of money in and out of market. Not very different from low-profit strategy employed by Nobels of LTCM, but at least they honestly used massive leverage (100:1 by some accounts) which got them into trouble when currency based market and trades went against them, while Bernie Madoff just took a detour into the Twilight Zone of massive Ponzi scheme.
With put premiums rising and call premiums shrinking this year, this strategy alone would bring serious losses, even without Ponzi scheme that no doubt exacerbated it. This failure is not going to help still ongoing financial liquidity and confidence issues, even with all the liquidity injected by Fed and Treasury since September.
Here's more details on his low-profit / profitless strategy from NY Post which is covering Madoff extensively in several articles in business section :
MADOFF'S STRATEGY WAS JUST TOO GOOD TO BE TRUE
Though it may take some time to understand the scope of the massive scam that Bernard Madoff is accused of pulling off, it's becoming clear that the investment strategy he touted couldn't on its own produce the results he boasted about.
More on the aftershocks here :
Observers say that Madoff's investment strategy alone would have suffered massive losses during the current stock market rout, had it not been helped along by what Madoff himself described as a Ponzi scheme.
Indeed, few on Wall Street realized that the avuncular market veteran even ran a hedge-fund operation, which focused on raising money from some of New York's uber-wealthy.
Madoff used what's called a "split-strike conversion" investment strategy, in which Madoff's firm bought a basket of stocks found in the Standard & Poor's 500 index.
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Najarian estimates that at best Madoff would have generated 5 percent or 6 percent annual returns. Factoring in the costs associated with the strategy, Madoff likely broke even at best.
LOSSE$ TO PUSH DC REGS
Beyond the shock that Madoff's investment strategy amounted to a house of cards, there's also the collateral damage that will arise from the scandal, especially among funds of hedge funds, which invest in pools of hedge funds on behalf of pensions, endowments and other investors.
Unlike individual investors, funds of hedge funds historically have a history of being more discerning about the hedge funds they invest in. In fact, their ability to conduct thorough due diligence is a main selling point to investors, like pension funds and wealthy individuals.
Yet, numerous well-respected fund of hedge-fund firms were fooled by Madoff's scam, including Walter Noel's Fairfield Greenwich Group and Tremont Capital Management.
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But it's not just firms linked to Madoff that will suffer, sources said, as the crisis of confidence already tainting the hedge-fund industry intensifies. That could trigger even more withdrawal requests, even at hedgies not affected by Madoff.