sentry investments is a hedge fund managed by bernard madoff. it has achieved unusually high and stable returns of 15% per year for over a decade. however, the investment strategy is not transparent and madoff does not charge typical fees. some skeptics have questioned whether the returns are too good to be true or involve cross-subsidies from madoff’s market-making business. there are also doubts whether the claim converter arbitrage strategy alone can generate such exceptional performance. this article provides a critical analysis of sentry investments and the doubts about its returns.
lack of transparency over sentry investments’ strategy
sentry investments purportedly employs a converter arbitrage strategy, trading s&p 100 stocks and options. however, the strategy description is vague and no one is able to replicate the exceptional returns. madoff refuses to provide details, claiming it is ‘proprietary’. some hedge fund managers doubt anyone could generate consistent double-digit returns simply from options trading. the lack of transparency has led some to guess that madoff uses his market-making business to smooth returns, which madoff denies as ‘ridiculous’.
doubts that converter arbitrage alone explains performance
experienced hedge fund investors say the description is ‘too simplistic’ and doubt converter arbitrage is the full story. some former madoff traders have questioned how the returns can be achieved purely through options trading. three options strategists at investment banks also cannot understand how madoff generates the numbers.
no typical fees charged despite massive amount of assets
sentry investments has $6-7 billion under management, which would translate to $240 million in annual fees typically. however, madoff does not charge any investment management or performance fees, saying “we’re happy making money from the commissions”. some suspect he uses market-making profits to cross-subsidize and smooth hedge fund returns, but madoff denies it.
demand for secrecy from investors
madoff requires his investors not to disclose their investment with him to anyone, stating “it’s no one’s business what goes on here”. some investors are not bothered by the secrecy and opaque strategy given the returns. but demanding secrecy should raise red flags about potential misconduct.
in summary, sentry investments’ exceptionally high and smooth returns over a decade, secretive and not fully understood strategy, lack of typical fees despite massive assets, as well as demands for investor secrecy have raised skepticism and doubts over its performance claims. while madoff denies any misconduct, the lack of transparency means one cannot rule out the returns involve cross-subsidization or are ‘too good to be true’.