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Gabriel Kurland, founder of Hedge Fund Appraisal, a provider of due diligence services based in Geneva, explains in his latest bulletin how investors can determine the possibility of a hedge fund fraud in the due diligence process:

According to Cohen & Felson (1979), fraud, like any other crime, can be explained by three factors: a supply of motivated offenders, the availability of suitable targets and the absence of capable guardians.

The risk of fraud is a product of both personality and environmental or situational variables. Motivation is what drives the act of fraud. Dishonesty is not always the sole driver. Two scenarios can be deduced: firstly, a dishonest person identifies suitable targets and, in the absence of capable guardians, organizes a scheme aimed to defraud the targets; or, secondly, in the course of business, a person reacts to a situation that will engender a motivation to commit a fraud. The situation can appear as a "low hanging" fraud opportunity to make money or as a stressed and unexpected situation.

If we apply the above definition to the financial world, and in particular to the hedge fund industry, the two scenarios can be rewritten as follows: a person forges himself an image of respectability and sells to naïve investors the promise of high returns with little risk in the unique goal to defraud them from their wealth. In this case, the unscrupulous pseudo hedge fund manager will first have to commit a misrepresentation to convi......................

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