LONDON (Reuters) – Fraud allegations against U.S.-based Bayou and Wood River have scared some investors away from hedge funds, but Pacific Alternative Asset Management Company (PAAMCO) saysbackground and operational checks should highlight any problems.
“Conflict of interest is a main risk … It could come from brokers, administrators, auditors or counterparties,” Andrew Chernick, investment operations manager at PAAMCO, told Reuters.
Chernick said one of the first things to look at is if a hedge fund runs its own brokerage division or trades through one in which it has a financial interest.
“It’s one of the main risk areas,” he said. “They might be paying this broker 200 pounds a trade when another broker is only charging 100 pounds … There might be excessive trading for the purposesof generating income.”
An auditor that has too close an involvement in a hedge fund is also a red flag, Chernick said.
