Suspicious Patterns in Hedge Fund Returns and the Risk of Fraud
Nicolas P. B. Bollen
Vanderbilt University - Finance
Veronika Krepely Pool
Indiana University - Kelley School of Business - Department of Finance
November 21, 2011
Recent cases of hedge fund fraud have caused large losses for investors and have fueled the debate regarding the ability of regulators to oversee the industry. This paper proposes a set of performance flags, based on suspicious patterns in returns, as indicators of a heightened risk of fraud. We collect a sample of hedge funds charged with legal or regulatory violations and find that funds charged with misappropriation, overvaluation, misrepresentation, or Ponzi schemes trigger the performance flags at a higher frequency than other funds.
Number of Pages in PDF File: 44
Keywords: hedge funds, fraud, SEC
JEL Classification: G23, G28
Date posted: March 15, 2010 ; Last revised: May 13, 2014
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