Hedge Funds: Fraud is a common reason for failure

SOURCE: OffshoreAlert

MIAMI, FL: February 15, 2007

Given that hedge funds tend to be complicated and unregulated, it should come as no surprise to investors to learn that fraud is one of the principal reasons they fail, as evidenced by such high-profile collapses as Long-Term Capital Management, Lancer Offshore, Beacon Hill, and Amaranth Advisors

These failures amid allegations that, collectively, billions of dollars of assets were misappropriated emphasize the need for investors and service providers to conduct thorough due diligence before investing or entering into a business relationship with hedge funds.

With this in mind, a special session on evaluating onshore and offshore hedge funds is being held at OffshoreAlert’s 5th Financial Due Diligence Conference, which takes place in Miami, Florida on April 24-25, 2007. Attendees will learn how to conduct background checks on the management, verify Net Asset Values, and, generally, identify red flags. Our panel is made up of Hannah Terhune, Founding Partner of Capital Management Law Group; Nancy Goldstein, Associate Managing Director of risk managers Kroll; Kevin Jones, principal of HedgeCheck; and Stuart Sybersma, a partner of Deloitte, in the Cayman Islands, where approximately 80% of the world’s hedge funds are believed to be domiciled.

More investors than ever are pouring money into hedge funds, whose assets under management had swelled to $1.43 trillion by December 31, 2006, representing a growth of nearly three times the $500 billion five years earlier. Yet how many of them conduct proper due diligence? Not many, judging by the farcical nature of some hedge fund failures, such as Lancer Offshore, which specialized in investing funds in thinly-traded, dubious penny stocks that were controlled by Lancer’s principal and his cronies. Investors could not even rely on Lancer’s auditors, who signed off on its financials despite the blatantly fraudulent nature of their investments.

Hedge funds have grown to be so popular with investors and play such a significant role in the global economy that, as recently as last weekend, finance ministers from the Group of Seven richest countries in the world met in Germany and high on their agenda was regulatory oversight of the largely unregulated hedge fund industry. Hedge funds have become “more complex and challenging”, according to a statement issued by the ministers, who fear that a major fund collapse could disrupt the world economy.

OffshoreAlert will go behind these “complex” and “challenging” issues during a special 75-minute session entitled ‘Hedge Fund Due Diligence: Onshore & Offshore’. Our comprehensive look at the industry will include analyzing jurisdictions, regulations, and techniques such as leveraging.

More information about this and other topics to be discussed at the 5th OffshoreAlert Due Diligence Conference can be viewed online at http://www.offshorealertconference.com/OACV/agenda.asp.