The billion‐dollar hedge fund fraud
| Published date | 01 April 2005 |
| Pages | 172-177 |
| Date | 01 April 2005 |
| DOI | https://doi.org/10.1108/13590790510624909 |
| Author | Greg N. Gregoriou,William Kelting |
| Subject Matter | Accounting & finance |
Journal of Financial Crime Ð Vol. 12 No. 2
The Billion-Dollar Hedge Fund Fraud
Greg N. Gregoriou and William Kelting
INTRODUCTION
With the increasing volatility in stock and bond
markets during the last two years investors are
parking pension fund money and endowment fund
money in onshore and oshore hedge funds. During
the last decade the number of hedge funds has
increased exponentially with assets ballooning to
almost $650bn.
1
Because hedge funds are loosely regu-
lated by the Securities and Exchange Commission
(SEC) and are not usually subject to the various `secur-
ity' Acts that the SEC administers they have managed
to keep their aairs and trading private. The recogni-
tion of hedge funds came in mid-September 1992,
when George Soros and his group at Quantum
nearly broke the Bank of England, by shorting
British sterling to the tune of $10bn. This resulted in
a quick pro®t of about $1bn that week. Since then,
hedge funds have been viewed with awe and as vil-
lains, by some, for destabilising market economies.
2
Today, nearly 48 per cent of hedge fund managers
are domiciled in the USA and most are not required
to register with the SEC. However, the number of o-
shore hedge funds is growing faster in anticipation of
tighter and stricter future SEC restrictions. The SEC
might propose that hedge fund managers register
with the SEC. Doing so would allow the SEC to
control an industry of well over $600bn. Will this
eliminate hedge fund fraud? Obviously not, especially
if the barriers to entry are low and if investors are
looking to hedge funds for added returns.
Several hedge fund fraud cases during the last few
years have captured the attention of the SEC.
Because of the number of investors such as pension
funds and endowments which pour billions into this
industry, it has warranted a second and closer look
by the SEC. A current push is under way by the
SEC to force hedge funds to provide greater transpar-
ency and make sure that their internal control struc-
ture performs soundly. This is to ensure that funds
are providers of good business and ethical practices,
but may unfortunately serve as an incentive to locate
oshore in an attempt to hide unwanted news or
even conceal the hedge fund manager's background.
This is easily done by simply shifting the fund's
assets and registering the fund in an oshore jurisdic-
tion, free of the SEC and its regulation. Forcing
hedge funds to become more transparent could
result in a tremendous out¯ow of capital from the
USA. Although many hedge fund managers are advo-
cating registration with the SEC, the world's largest
hedge funds (ie Soros Group of Quantum Funds,
Zweig-DiMenna and Moore Global among others)
are located in oshore jurisdictions.
The brightest brains on Wall Street and many
talented money managers tend to migrate to the
hedge fund industry. There are a few notable man-
agers: Je Vinik, for example, who after managing
the $50bn Fidelity Magellan Fund formed his own
hedge fund and produced spectacular returns for his
clients. However, having an unregulated environ-
ment invites hedge fund managers, of whom many
are unwilling to play by the rules, to enter the industry
as well. Additionally, many well-known money man-
agers have also crossed over to the hedge fund indus-
try, some of whom were under the close scrutiny of
the SEC, and decided to open hedge funds to escape
the regulated environment. Information concerning
references, quali®cations, investment process, per-
formance of the fund, ethics, and ability to have a
®nancial solid and solvent position can be fabricated.
Therefore, data made available by the fund itself or
by database vendors in the hedge fund industry can
often be misleading. Hedge fund database vendors,
such as Hedge Fund Research and TASS, simply
receive returns net of all fees from hedge funds. In
some cases, stellar performance may be a sign of
impending doom or may warrant another look at
the hedge fund manager's practices. Furthermore,
seeing a ®ve-year track record without a single nega-
tive month may be a sign that the manager may be
`cooking the books'.
THE MEMORANDUM, LACK OF
TRANSPARENCY AND INFLATED
RETURNS
An assessment of the oering memorandum of hedge
funds may be an unsatisfactory document, especially if
memorandums are not drafted by attorneys specialis-
ing in the investment areas. Furthermore, one must
make sure the investment objectives of hedge funds
are properly de®ned and that the document does not
Page 172
Journalof Financial Crime
Vol.12,No. 2, 2004,pp.172±177
#HenryStewart Publications
ISSN1359-0790
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