On the trail of crooked hedge funds

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Financial Times
By Kevin Allison and Stephen Schurr
Published: March 8 2005 02:00 | Last updated: March 8 2005 02:00

The notion that hedge funds are the purview of "sophisticated investors" needs serious refining or, even better, hedge fund investors need to start living up to their reputation.

While the industry has matured as institutional clients demand greater visibility, the recent spate of blow-ups at hedge funds such as KL Financial, NorthShore and Tradewinds makes it painfully clear that more than a handful of outlaws still roam the countryside.

The Securities and Exchange Commission has brought 51 cases against hedge funds in the past five years with investor losses totalling more than $1.1bn. Meanwhile, a study by financial consultant Capco last year found valuation issues played a role in 35 per cent of hedge fund failures, with more than half of those due to fraud or misrepresentation.

The SEC is slowly introducing greater oversight of the hedge fund world but even the agency's supporters acknowledge measures such as registration with the SEC will do little to deter fraud. Indeed, with as many as 10,000 hedge funds extant and scant oversight into how funds value assets and calculate returns, one of the easiest predictions to make is that 2005 will witness more high-profile hedge fund meltdowns.

http://news.ft.com/cms/s/545f1000-8f77-11d9-af70-00000e2511c8.html