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Alternative Market Briefing

Madoff Effect continues to see investors focus more on fraud risk than operational risk

Tuesday, June 29, 2010

From Kirsten Bischoff, Opalesque New York:

The Madoff fraud may have shined a light on hedge fund due diligence, but more than two years later, the hedge fund investor community continues to lack uniformity in their approach to this important part of the investment process.

“Analysis shows that frauds such as Madoff’s have caused investors to tailor their hedge fund operational due diligence process to focus on the red flags of recent frauds. While this approach has advantages, it assumes that frauds can be modeled and has led to marginalization of other equally important operational risk factors,” finds Hedge Fund Due Diligence: The Madoff Effect, the latest in a series of studies being conducted by due diligence specialist Corgentum Consulting.

This newly published study looked to responses from over 200 hedge fund allocation organizations in an attempt to illustrate the expansive differences in breadth and depth that occur in investors’ approach to manager due diligence.

“Due diligence is an imperfect information marketplace,” says Jason Scharman, Managing Partner at Corgentum and author of Hedge Fund Operational Due Diligence: Understanding the Risks. “People doing this type of work don’t necessar......................

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