Posted by Susan Mangiero on October 29, 2012

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Adding to its enforcement actions, the U.S. Securities and Exchange Commission (SEC) has charged a former $1 billion hedge fund advisory firm, its founder and its chief financial officer with inflating asset values. As a result, regulators assert that pension funds and other investors were misled about the safety and liquidity of the investments and overpaid fees.

According to SEC Charges Hedge Fund Adviser and Two Executives With Fraud in Continuing Probe of Suspicious Fund Performance , (SEC press release, October 17, 2012), this is the seventh case brought by the Enforcement Division’s Asset Management Unit. They employ proprietary analytics to identify hedge funds with suspicious returns.

In a read of the complaint. the SEC alleged that the hedge fund did not adhere to its stated valuation policies. Other hedge funds may want to pay heed and make sure that their valuation policies are clear, manageable and shared with institutional investors. Having no valuaton policy is ill-advised although one might assert that a dearth of documents could mean that failure to adhere goes away.

Other cases that came about as a result of the SEC’s analysis of investment performance in search of outliers can be found by visiting SEC Charges Multiple Hedge Fund Managers with Fraud in Inquiry Targeting Suspicious Investment Returns (SEC press release, December 1, 2011).

As an expert in performance reporting methods, valuation and risk assessment, Dr. Susan Mangiero has rendered opinions about whether reported numbers reflect what can best be described as economic reality. Investment reporting is a broad topic but suffice it to say, certain numbers don’t make sense in the context of a given strategy and prevailing market conditions.

Investors — especially large size organizations — can hire knowledgeable persons to parse reported numbers and/or engage a consultant to assist. Increasingly, there is evidence that institutions such as pension plans and endowments are reluctant to green light a fund unless they have a solid understanding of how numbers will be put together, who will monitor data reporting and what safeguards are in place to avoid fuzzy math.

Click to access ERISA Pension Plans’ Due Diligence for Hedge Funds and Private Equity Funds. Avoiding the Pitfalls of Alternative Investments for Institutional Investors and Fund Managers by Dr. Susan Mangiero and Attorney Alexandra Poe, Strafford Publications, May 30, 3012.