A longtime reader of this blog got himself Bernie Madoff’s return series from a Fairfield Sentry marketing document and plugged it into an Excel spreadsheet; he then graphed the one-year rolling volatility of Madoff’s returns. The results are interesting: click on them for a bigger, easier-to-read version.
It seems to me (and the annotations are all mine) that this graph is consistent with Justin Fox’s theory that Madoff was artificially smoothing his returns until the dot-com blowup, at which point he went Full Ponzi.
In other words, Madoff was never fully legitimate — or at least, looking at this chart, he seems to have been pretty illegitimate from at least 1995 onwards. But he might not have been actively stealing his clients’ money until he blew up at the beginning of this decade, and subsequently moved from being a dishonest fund manager to the operator of a fully-fledged Ponzi scheme.