Hedge fund Fraud

The following is an essay about hedge fund fraud. The essay looks into two terms hedge fund and fraud. A hedge fund is simply an investment vehicle, which is used by corporate and other individuals who have a high level of per capita income. The term hedge fund is not a legal term but a term, which is used to refer to those investments, which are regulated by the common investment regulatory authorities and are self-regulated.

Because of the complexity of transactions involved, this kind of fund is restricted to individuals with a great net worth or corporations, which can monitor and oversee their operations. Hedge fund deals with a portfolio, which has investments such as, bonds bills, mutual funds, stocks, as well as real estate management (Walker, 2010)

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Hedge funds tend to be some of the organizations, which rake in huge profits for their investors because they are not externally, controlled meaning they can invest in a wider range of options. They are also not limited on which techniques to use such as holding stocks and speculation. They also employ variety of strategies to analyze the market trends (Walker, 2010). This creates a buffer from failing during the bear season. They are also diversified in that they invest in a wider range of options.

However, the challenge with hedge funds is that they are prone to being defrauded by the hedge managers. There have been many cases of hedge fund fraud in many countries. This is because the investors internally regulate most of the hedge funds. If the investors are not sophisticated and are not smarter than the manager hedge manager can take advantage of this and mismanage the fund.

One of such instances where the manager defrauded the investors was that of Philip Baker of Lakeshore Hedge Fund where he defrauded over nine hundred investors by releasing false information about the profits and the earnings of the company. This meant that he wanted to defraud the investors their dividends.

Other fund managers have been accused of maintaining riotous living at the expense of the funds, which they manage. They misuse the funds in the name of company expenses. One of such managers who were accused of this type of a fraud was Daedelous Partners case where the managers were accused of giving out false financial statements by indicating that the fund had made huge profits yet they had used the profits to fund their lifestyle (Stulz, 2007).

Another case of fraud, which usually happens in hedge funds, is that of insider trading where the managers use their influence to buy properties from their accomplices at inflated prices, which certainly means that the investor will have little or no profit. This happened in the case of Capital Time Global Growth Fund where the manager was convicted of having provided false information to the investors concerning the value of stocks in which the company was investing. This led to the collapse of that hedge fund (Stulz, 2007).

To prevent these frauds pertaining to the hedge fund the federal government instituted a department in the Federal Bureau of Investigation whose sole responsibility is to investigate these funds. Their work is to investigate the transactions as well as the information released to the investors by the managers to ensure that they are in tandem. This will make the investors to be more informed of the operations of the hedge fund.

References

Stulz, R. (2007). Hedge funds past, present, and Future. Journal of Economic Perspectives, 21 (2), 175-194.

Walker, S. (2010). Wave theory for alternative investments. New York: McGraw-Hill Companies.