According to a recent study by Jardine Mckenzie, some hedge funds’ managers may intentionally inflate returns to avoid reporting losses and keep investors on board. 
United States of America (Press Release) January 29, 2008 --
Sources close to the Tokyo based firm revealed that, according to the recent study conducted by Jardine Mckenzie, signs of such misreporting in the $1.7 trillion industry are more common among managers who focus on securities that don't trade much.
Concerns about how hedge funds value such illiquid holdings and report performance have increased in recent months as this summer's credit crisis disrupted trading of mortgage-backed securities as well as other more complex securities such as collateralized debt obligations.
If securities don't trade, they have to be valued using similar securities or mathematical models that rely more on assumptions and give managers more leeway, explained an Jardine Mckenzie spokesperson.
According to a source, Geoff Whiteman of Jardine Mckenzie recently said that hedge fund investors should question the accuracy of past returns and not put so much emphasis on the frequency of positive returns.
He apparently went on to add that investors should also be aware that such distortions could favor those withdrawing their money over those putting cash into a hedge fund.
Concerns about how hedge funds value such illiquid holdings and report performance have increased in recent months as this summer's credit crisis disrupted trading of mortgage-backed securities as well as other more complex securities such as collateralized debt obligations.
If securities don't trade, they have to be valued using similar securities or mathematical models that rely more on assumptions and give managers more leeway, explained an Jardine Mckenzie spokesperson.
According to a source, Geoff Whiteman of Jardine Mckenzie recently said that hedge fund investors should question the accuracy of past returns and not put so much emphasis on the frequency of positive returns.
He apparently went on to add that investors should also be aware that such distortions could favor those withdrawing their money over those putting cash into a hedge fund.
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