Part 1 - Ghost-busting frauds of the past: a challenge for new managers

"Hedge funds are less encumbered by government regulation, less transparent to investors, play more complex games, take bigger risks, and capture the public imagination in a way that their lesser counterparts have difficulty approaching. These unique features have resulted in an increasing scale of losses due to fraud, with no corresponding increases in safeguards available for investors," says Bruce Johnson in his book, The Hedge Fund Fraud Casebook (Wiley, 2010).

This would mean that emerging managers would be grappling with the "dark side of hedge funds' secretive world."

This is not really the case anymore, however.

Now investors, regulators and investigators are more vigilant than ever through more focused due diligence, required registrations and check-ups; a high level of transparency from managers is the new black; and new regulations are being implemented all around to better harness the wild spirits and the bad apples (such as Dodd-Frank in the U.S. and the AIFMD in the EU). So the risk of being victim of a hedge fund fraudster is lessening - a little bit.

What does it mean for newcomers?

It is already hard for new hedge funds to raise new capital and to meet new demands from investors and regulators.

But are frauds of the past haunting their struggling beginnings?

According to most of the experts interviewed by Opalesque, the answer is; not in a bad way. Frauds of the past can be ghostbusted with more thorough DD (due diligence), better operations and reputable independent service providers.

When asked, to what extent the amount of financial frauds in the U.S. is deterring investors from investing in emerging managers (particularly hedge fund managers), they replied; not as much as one would think.

The emerging hedge fund manager......................

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This article was published in Opalesque's New Managers a top-down monthly analysis, news and research publication on the global emerging manager space.