A recent Financial Times article made note of a revealing report based on research conducted at the New York University Stern School of Business. Based on a review of over 400 confidential reports, that were compiled by a major due diligence investigative firm, findings indicate that statements and materials provided by hedge fund managers contain factual misrepresentations in a number of key areas.
Most often, those misrepresentations from managers involved past legal and regulatory problems stated, fund asset information and overall performance levels. The following is an abstract of the some of the data collected and reported:
“42% of the funds [reviewed during this research study] had either a misrepresentation or an inconsistency problem”
“in 21% of the cases, the manager verbally stated incorrect information”
“10% of the asset and 4.5% of performance data disagreed between the fund and either the administrator or the auditor”
“20% of managers interviewed had poor recollection about basic levels of asset performance”
While there are managers that fall into the category of purposefully misrepresenting information (i.e. legal histories, regulatory infractions, accurate performance and asset information etc.), the research conducted also indicated that
“10% of funds would have been classified as non-problem funds based on the information disclosed voluntarily [to the due diligence investigative firm] and through any precompiled due diligence questionnaires, but were found to be problem funds after background checks…”
The suggestion based on this research is that misrepresentations made by managers is a more common occurrence than investors may have suspected.
While reviewing offering documents and questionnaires prepared by the managers and/or conducting interviews may be one part of the due diligence process, it is clear that further fact checking, cross checking of information and attempting to verify all information disclosed by the managers is critical. Background checks on the manager, fund and key personnel is key in identifying and following up on supplemental information uncovered that may not have been originally disclosed and verifying that information which has been.
