The CFA Institute (of which several members of Castle Hall's team are members) has recently published ten "tips" on avoiding fraud (available here.)
Tuesday, January 27, 2009
CFA Institute Guide to Fraud Prevention
The list is fairly obvious, but worth repeating:
1) Understand the investment strategy
2) Match investment strategy to reported performance
3) Watch for e-mail solicitations and internet fraud
4) Be wary of "sure things", quick returns and special access
5) Understand what, if any, regulatory oversight exists (As an aside, we are not convinced by the Institute's comment that investors should be "careful of offshore investments". Given the conspicuous failure of multiple layers of the US regulatory regime in the Madoff affair, investors outside the US could very well be saying that investors should be "careful of US investments".)
6) Assess the operational risk and infrastructure.
This is, of course, a point with which we do agree. The CFA Institute comments that: "any investment management operation should have an infrastructure for trading and administration. Ask to see them, and inquire about the firm's processes and controls. It is important that a firm have separate, independent operations for asset management, trading, and custody to provide checks and balances against fraud."
7) Ask about independent audits and who performs them.
In case of interest, our most recent comments on some of the issues raised by current hedge fund audits can be found here.
8) Assess the personnel
9) Perform a background check
10) Limit your exposure.
All sensible stuff.
Posted by Bud Fox at 8:30 AM