Fraud against hedge funds: implications to operational risk and due diligence

2020 ◽  
Vol 27 (1) ◽  
pp. 67-77
Author(s):  
Majed R. Muhtaseb
Keyword(s):  
Hedge Funds ◽  
Hedge Fund ◽  
Operational Risk ◽  
Future Research ◽  
Due Diligence ◽  
Law Firm ◽  
Short Term ◽  
Content Type ◽  
Fund Managers

Purpose The loss of an amount in excess of $100m cash deposit can be disruptive to the operations, definitely the liquidity of the hedge fund. Should a hedge fund liquidity position deteriorate, its compromised solvency could impact its vendors, most notably creditors and prime brokers. Large successful hedge funds do make basic mistakes. Lawyer Marc Dreier committed the criminal act of selling fraudulent promissory notes to hedge funds and others. Mr Drier’s success in selling fraudulent promissory notes was facilitated by his accomplices who posed as fake representatives of legitimate institutions. Drier and team presented bogus “audited financial statements” and forged developer’s signatures, and even went as far as using the unsuspecting institutions’ premises for meetings to meet potential notes buyers to further falsely legitimize the scheme. He had the notes buyers send their payments to his law firm account, to secure the money. His actions cost his victims, who include 13 hedge fund managers, other investors and entities, $400m in addition to his law firm’s employees who also suffered when his law firm was dissolved. For his actions, he was sentenced 20 years in federal prison for investment fraud. This study aims to direct hedge fund investors and other stakeholders to thoroughly vet the compliance function, especially controls on cash disbursements, even if the hedge fund is sizable (in excess of $1bn). Investors and even other stakeholders also should place a greater focus on what is usually overlooked issue; most notably the credit quality and authenticity of short-term investments bought by their hedge funds. Design/methodology/approach A thorough investigation of a fraud committed by a lawyer against a number of hedge funds. Several important lessons are identified to professionals who conduct due diligence on hedge funds. Findings The details of the case are very remarkable. This case directs investors’ attention to place greater efforts on certain aspects of operational risk and due diligence on not only hedge funds but also other investment managers. Normally investors conduct operational due diligence on the fund and its operations. Investors also vet fund external parties such as prime brokers, custodians, accountants and fund administrators. Yet, investors normally do not suspect the quality of short-term fund investments. In this case, the short-terms investments were the source of unforeseen yet substantial risk. Research limitations/implications Stakeholders in hedge funds need to carefully investigate the issuer of and the quality of short-term investments that a hedge fund invests in. Future research can investigate the association of hedge fund manager failure with a liquidity position of the fund. Practical implications Investors must thoroughly the entirety of the fund including short-term securities. Originality/value Normally, it is the hedge funds that commit the fraud against investors. In this case, it is the multi-billion hedge funds run by sophisticated fund managers, who are the victims.

Portraits of five hedge fund fraud cases

2008 ◽  
Vol 15 (2) ◽  
pp. 179-213 ◽  
Author(s):  
Majed R. Muhtaseb ◽  
Chun Chun “Sylvia” Yang
Keyword(s):  
Asset Management ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Investment Fund ◽  
Good Opportunity ◽  
Content Type ◽  
Fund Managers ◽  
Management Group ◽  
Fund Industry ◽  
Asset Managers

PurposeThe purpose of this paper is two fold: educate investors about hedge fund managers' activities prior to the fraud recognition by the authorities and to help investors and other stakeholders in the hedge fund industry identify red flags before fraud is actually committed.Design/methodology/approachThe paper investigates fraud committed by the Bayou Funds, Beacon Hill Asset Management, Lancer Management Group (LMG), Lipper & Company and Maricopa investment fund. The fraud activities took place during 2000 and 2005.FindingsThe five cases alone cost the hedge fund investors more than $1.5 billion. Investors may have had a good opportunity for avoiding the irrecoverable costs of the fraud had they carefully vetted the backgrounds of the hedge fund managers and/or continuously monitored the funds activities, especially during turbulent market environments.Originality/valueThis is the first research paper to identify and extensively investigate fraud committed by hedge funds. In spite of the size of the hedge fund industry and relatively substantial level and inevitably recurring fraud, academic journals are to yet address this issue. The paper is of great value to hedge funds and their individual and institutional investors, asset managers, financial advisers and regulators.

Are hedge fund returns affected by media coverage of macroeconomic news?

2019 ◽  
Vol 36 (3) ◽  
pp. 427-439
Author(s):  
Sandip Dutta ◽  
James Thorson
Keyword(s):  
Hedge Funds ◽  
Media Coverage ◽  
Hedge Fund ◽  
Real Sector ◽  
Macroeconomic News ◽  
Content Type ◽  
Fund Managers ◽  
News Announcements ◽  
Hedge Fund Returns ◽  
The Impact

Purpose Extant literature suggests that the difficulty associated with the interpretation of macroeconomic news announcements by the market in general in different economic environments, might be the reason why most studies do not find any significant relationship between real-sector macroeconomic variables and financial asset returns. This paper aims to use a different approach to measure macroeconomic news. The objective is to examine if a different measure of a macroeconomic news variable, constructed from media coverage of the same, significantly affects hedge fund returns. Design/methodology/approach The authors use a news index for unemployment, which is a real-sector variable, constructed from newspaper coverage of unemployment announcements and examine its impact on hedge fund returns. Findings Contrary to the other studies that examine the impact of macroeconomic news on hedge fund returns, the authors find that media coverage of unemployment news announcements significantly affects hedge fund returns. Practical implications Overall, this paper demonstrates that the manner in which the market interprets macroeconomic news announcements in different economic environments is probably a more relevant factor for hedge funds and is more likely to impact hedge fund returns. In conjunction with variables – constructed from media coverage of unemployment news announcements – that factor in the manner of interpretation, it is found that surprises also matter for hedge fund returns. This is an important consideration for hedge fund managers as well. Originality/value To the best of the authors’ knowledge, this is the first study that examines the impact of media coverage of macroeconomic news announcements on hedge fund returns and finds significantly different results with real-sector macro variables.

Hedge Funds and Financial Misreporting

2021 ◽  
pp. 392-418
Author(s):  
Philippe Jorion
Keyword(s):  
Empirical Evidence ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Compensation System ◽  
Good News ◽  
Regulatory Environment ◽  
Due Diligence ◽  
Financial Misreporting ◽  
Hedge Fund Returns

The growth of the hedge fund industry can be ascribed to its performance-based incentive compensation system as well as a lighter regulatory environment. These features, however, could also potentially create more opportunities for financial misreporting and even fraud. In response, recent research has attempted to detect misreporting by using due diligence information or by examining patterns in hedge fund returns. Empirical evidence suggests that hedge fund fraud can be usefully predicted from due diligence information, especially evidence of previous misrepresentation. Predicting misreporting from hedge fund returns, however, is much more difficult. This is because returns may reflect patterns in underlying assets instead of manager manipulation. For hedge fund investors, the good news is that the accumulated body of experience about detecting misreporting should help improve the quality of hedge fund investments. In addition, newly-imposed registration requirements for hedge fund advisors should also lower occurrences of misreporting.

A hedge fund collapse and diversification 101: lessons to stakeholders

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Majed R. Muhtaseb
Keyword(s):  
Hedge Funds ◽  
Stock Price ◽  
Hedge Fund ◽  
Securities And Exchange Commission ◽  
Fiduciary Duty ◽  
Due Diligence ◽  
Content Type ◽  
The Public ◽  
Operational Risks ◽  
Fund Industry

Purpose The purpose of this paper is events and analysis of present a hedge fund collapse, offer lessons to investors and hedge fund industry stakeholders and propose a possible remedy for mitigating operational risks and associated potential losses. Design/methodology/approach This study focused on one hedge fund case study and conducted a thorough investigation of the events that led to the collapse and eventual filing of the Securities and Exchange Commission (SEC) complaint. All articles and publications used for this research are available in the public domain and accessible. Findings Wood River Capital Management had concentrated the portfolios of its two hedge funds into one stock, EndWave Corp. Fund Manager violated terms of offering memorandum. Investors were not made aware of and did not discover the operational risks. Stock price of EndWave plummeted. There was no independent oversight over the funds. The values of the two funds dropped significantly. Investors attempted to redeem but the funds were not liquid. The SEC filed a complaint. Mr Whittier was sentenced for three years in jail. Research limitations/implications It is an analysis of US-based hedge fund, not an empirical paper. The article presents critical analysis and offers many valuable lessons to hedge fund industry stakeholders. Practical implications This paper helps investors in terms of identifying a hedge fund’s operational risks and conducting more effective due diligence while vetting a hedge fund. This could potentially save investors and constituents billions of dollars, by avoiding potential hedge fund collapses. This paper suggests that the scope of fiduciary duty be expanded to cover hedge fund industry vendors. Originality/value Thorough research of a hedge fund that collapsed because of poor investment decisions, not self-enrichment at expense of fund investors. This paper provides lessons to investors in terms of identifying a hedge fund’s critical operational risks and conducting value preserving due diligence. This could potentially save hedge funds investors billions of dollars, by avoiding potential hedge fund collapses. This paper recommends that the scope of fiduciary duty be expanded to cover hedge fund industry vendors.

Trends and Future Prospects of Hedge Funds

2017 ◽  
Author(s):  
Hunter M. Holzhauer
Keyword(s):  
Hedge Funds ◽  
Hedge Fund ◽  
Historical Context ◽  
Cost Savings ◽  
Short Term ◽  
Fund Managers ◽  
Potential Impact ◽  
Fund Industry

This chapter focuses on new trends in the hedge fund industry. The chapter begins by creating some historical context for the current perception and state of hedge funds. The remainder of this chapter focuses on the following trends and their potential impact on the industry: (1) growth in all areas of the industry, especially in terms of long-term capital flows from institutional investors; (2) uncertainty about growth in the short term; (3) ways hedge funds approach growth; (4) the need for more diversity among hedge fund managers, including more minorities and women; (5) diverging long-term objectives for larger and smaller hedge funds; (6) future cost savings to investors; (7) development of new investment options to address liquidity concerns for investors; (8) new regulations; and (9) the future role of technology in the hedge fund industry.

Hedge fund stratagems and long-run SEO firm performance

2019 ◽  
Vol 45 (7) ◽  
pp. 886-903
Author(s):  
Robert M. Hull ◽  
Sungkyu Kwak ◽  
Rosemary Walker
Keyword(s):  
Stock Returns ◽  
Hedge Funds ◽  
Stock Price ◽  
Hedge Fund ◽  
Content Type ◽  
Fund Managers ◽  
Long Run ◽  
Short Run ◽  
Price Movements ◽  
Variable Bias

Purpose The purpose of this paper is to explore if hedge fund variables (HFVs) are associated with long-run compounded raw returns (CRRs) for seasoned equity offering (SEO) firms for a six-year window around the offering month for firms undergoing SEOs. Design/methodology/approach The event study methodology is used to calculate long-run CRRs that are used in a regression model as dependent variables. Independent variables include HFVs and nonhedge fund variables (NFVs) with standard errors clustered at the month level. Findings Three new long-run findings, consistent with recent short-run findings, are offered. First, HFVs are significantly associated with long-run CRRs for SEO firms. Second, HFVs perform competitively compared to NFVs. Third, a potential omitted-variable bias results if HFVs are not used. Research limitations/implications This research assumes that hedge fund managers can identify good (poor) performing SEO firm that allow for profitable long (short) positions. The proportion of hedge funds using a strategy will change in the hypothesized manner needed to make profit. Practical implications Hedge fund managers can use long-run strategies to capitalize on price movements around significant corporate events. Social implications Larger institutional traders have investment advantages due to superior knowledge and greater ability to manipulate prices. Originality/value This research is the first study to detail the significant association between hedge fund stratagems and long-run stock returns for firms undergoing key corporate events. This study demonstrates the need to consider hedge fund strategies when trying to understand stock price movements.

National Football League faces hedge fund manager fraud: implications for professional associations and investors from the case of international management associates

2015 ◽  
Vol 16 (3) ◽  
pp. 49-54
Author(s):  
Majed Muhtaseb
Keyword(s):  
Financial Reporting ◽  
Hedge Funds ◽  
National Football League ◽  
Hedge Fund ◽  
Professional Associations ◽  
Securities And Exchange Commission ◽  
Disciplinary Action ◽  
Content Type ◽  
Fund Managers ◽  
Investment Manager

Purpose – To describe the fraudulent activity of investment manager Kirk S. Wright and to discuss its implications for investors and professional associations. Design/methodology/approach – Describes how Mr Wright established and built his fund business, how he solicited investors, how he falsified financial reporting to investors, how investors discovered his fraud and filed lawsuits, how the US Securities and Exchange Commission (SEC) and the Federal Bureau of Investigation (FBI) took disciplinary action, and how National Football League (NFL) players unsuccessfully sued the NFL and its players’ union for recommending Mr Wright’s firm. Draws lessons from the story for investors and associations. Findings – Since hedge funds are not as strictly regulated as other investment vehicles, investors need to take extra steps to not fall prey to unscrupulous fund managers. Originality/value – Detailed, informative case study.

Hospital information systems in developing countries: a state-of-the-art systematic review

Kybernetes ◽  
2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Jie Lei ◽  
Jianming Liu ◽  
Wu Li
Keyword(s):  
Health Care ◽  
Information System ◽  
Developing Countries ◽  
Health Care Services ◽  
Developed Countries ◽  
Future Research ◽  
Local Conditions ◽  
Content Type ◽  
The Government

Purpose Hospital information system (HIS) can be examined as a vital factor for developing the quality of health care and cost managing. There exists abundant literature on HISs, but implementation-based literature of HIS is rare, typically about progressive countries. However, a study that can comprehensively review published articles is scarce. Therefore, this paper aims to examine the systematic and comprehensive study of HIS in developed countries. Together, the benefits and harms relevant to HIS’s different mechanisms have been considered, and the fundamental challenges of them are addressed to design more efficient HIS in the future. Design/methodology/approach HIS has been used globally for numerous years and is now being used in a wide area. HIS is broadly used in clinical settings. Information technology (IT) and information system have been suggested as a required piece to solve the health-care-related issues. Hence, to improve HIS’s ability, this paper conducted a review method concentratating on research related to HIS until 2019. A total of 21 papers were recognized and examined as principal research for the summary. Findings The authors found that HIS can help in reduction of medical mistakes, enhancement doctors’ performance and increase in the quality of the care provided. HIS management can be used to provide better health-care services. Therefore, HIS must be sensible and use clear structures. The authors conclude that, generally, with an increase in awareness, acceptability and the need for HIS worldwide, there will be more strategies and approaches available. Research limitations/implications First, this paper provides an outline of the status of HIS. Second, it identifies some distinct research gaps that could be worth studying. Some flawless work may be removed because of applying some filters to select the original articles. Surveying all the papers on the topic of HIS is impossible, too. Practical implications Design and sustainability of HIS is still a big issue for most developing countries, despite its wide usage in the developed countries. The technology is changing rapidly, so the field should be reviewed regularly. This paper suggests a suitable framework that will guide HIS in the local conditions of developing countries. Social implications The government will be assisted by the suggested solving ways in its performance and design of electronic health-care projects. Originality/value The study brings the viewpoints on the state of HIS mechanisms in developing countries. The paper’s results can offer visions into future research requirements. By providing comparative information and analyzing the current growths in this area, this study will support researchers and professionals to understand the progress in HIS mechanisms better.

Determinants of Hedge Fund Internal Controls and Fees

2010 ◽  
Vol 85 (6) ◽  
pp. 1887-1919 ◽  
Author(s):  
Gavin Cassar ◽  
Joseph Gerakos
Keyword(s):  
Hedge Funds ◽  
Agency Costs ◽  
Hedge Fund ◽  
Short Selling ◽  
Internal Controls ◽  
Fund Managers ◽  
Asset Value ◽  
Net Asset Value ◽  
Financial Misstatements ◽  
Financial Misstatement

ABSTRACT: We investigate the determinants of hedge fund internal controls and their association with the fees that funds charge investors. Hedge funds are subject to minimal regulation. Hence, hedge fund managers voluntarily implement internal controls, and managers and investors freely contract on fees. We find that internal controls are stronger in funds with higher potential agency costs. Further, internal controls are stronger in funds domiciled in jurisdictions that provide investors with limited legal redress for fraud and financial misstatements. Short selling funds, however, are more likely to protect information about their investment positions by implementing weaker internal controls. With respect to fees, we find that the percentage of positive profits that the manager receives increases in the strength of the fund’s internal controls. Finally, removing the manager from setting and reporting the fund’s official net asset value, along with reputational incentives and monitoring by leverage providers, are all associated with lower likelihoods of future regulatory investigations of fraud and/or financial misstatement.

Supply chain agility in humanitarian protracted operations

2016 ◽  
Vol 6 (2) ◽  
pp. 173-201 ◽  
Author(s):  
Cécile L'Hermitte ◽  
Peter Tatham ◽  
Ben Brooks ◽  
Marcus Bowles
Keyword(s):  
Supply Chain ◽  
Humanitarian Logistics ◽  
Future Research ◽  
Short Term ◽  
Content Type ◽  
Emergency Operations ◽  
Supply Chain Agility ◽  
Agile Practices ◽  
Basic Features

Purpose – The purpose of this paper is to extend the concept of agility in humanitarian logistics beyond emergency operations. Since the humanitarian logistics literature focuses primarily on emergencies and sees longer term and regular operations as being conducted in relatively stable and predictable environments, agile practices are usually not associated with humanitarian protracted operations. Therefore, this paper explores the logistics and supply chain environment in such operations in order to identify their basic features and determine if agility is an important requirement. Design/methodology/approach – Using a case study of the United Nations World Food Programme, the authors collected and analysed qualitative and quantitative data on the characteristics of protracted operations, the risks and uncertainties most frequently encountered, their impact, and the ways that field logisticians manage contingencies. Findings – The research demonstrates that unpredictability and disruptions exist in protracted operations. Therefore, short-term operational adjustments and agile practices are needed in order to support the continuity of humanitarian deliveries. Research limitations/implications – Future research should focus on a wider range of humanitarian organisations and move from a descriptive to a prescriptive approach in order to inform practice. Notwithstanding these limitations, the study highlights the need for academics to broaden the scope of their research beyond emergencies and to address the specific needs of humanitarian organisations involved in longer term operations. Originality/value – This paper is the first empirical research focusing exclusively on the logistics features of humanitarian protracted operations. It provides a more concrete and complete understanding of these operations.

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