Suspicious Patterns in Hedge Fund Returns and the Risk of Fraud

44 Pages Posted: 15 Mar 2010 Last revised: 13 May 2014

Nicolas P. B. Bollen

Vanderbilt University - Finance

Veronika Krepely Pool

Indiana University - Kelley School of Business - Department of Finance

Date Written: November 21, 2011

Abstract

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.

Keywords: hedge funds, fraud, SEC

JEL Classification: G23, G28

Suggested Citation

Bollen, Nicolas P. B. and Pool, Veronika Krepely, Suspicious Patterns in Hedge Fund Returns and the Risk of Fraud (November 21, 2011). Available at SSRN: https://ssrn.com/abstract=1569626 or http://dx.doi.org/10.2139/ssrn.1569626

Nicolas P.B. Bollen (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

HOME PAGE: http://mba.vanderbilt.edu/faculty/nbollen.cfm

Veronika Krepely Pool

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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