Pool, Veronika Krepely --- "Hedge Funds and the Detection of Managerial Fraud" [2012] ELECD 243; in Athanassiou, Phoebus (ed), "Research Handbook on Hedge Funds, Private Equity and Alternative Investments" (Edward Elgar Publishing, 2012)

Book Title: Research Handbook on Hedge Funds, Private Equity and Alternative Investments

Editor(s): Athanassiou, Phoebus

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781849802789

Section: Chapter 8

Section Title: Hedge Funds and the Detection of Managerial Fraud

Author(s): Pool, Veronika Krepely

Number of pages: 26

Extract:

8. Hedge funds and the detection of
managerial fraud
Veronika Krepely Pool*


INTRODUCTION

Hedge funds are among the most active financial markets participants.
While no official statistics exist, it is commonly cited that they account
for at least half of the daily trading volume on the major exchanges.1 Yet
hedge funds are perhaps also the least transparent financial institutions.
Taking advantage of the safe harbor provisions of the securities statues,
hedge funds have historically escaped registration with the Securities and
Exchange Commission (SEC) as well as disclosure requirements and are
currently only subject to the anti-fraud provisions of the law.2 Their lack of
transparency raises questions about how common fraud is in the industry
and whether the sector's opaqueness increases the propensity for unscrupu-
lous managerial behavior. Recent hedge fund scandals have further exacer-
bated these suspicions. Moreover, while the number of scandals (and that
of regulatory enforcement cases against hedge funds) is relatively small, the
instances of fraud that do come to light tend to be very brazen. Could this
suggest that, while perhaps common, hedge fund fraud is often undetected,
especially if it does not lead to the fund's demise? What do we know about
managerial wrongdoing in the hedge fund industry?
The purpose of this chapter is to address those questions by survey-
ing academic research on hedge fund fraud. This is a relatively new but
fast-growing research area. While managerial wrongdoing can take many
different forms, the literature and this ...