Academics dabble in vexillology to better predict hedge fund fraud

Apr 11th, 2010 | Filed under: Academic Research, Performance, Analytics & Metrics, Today's Post | By:
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(C) YuGovernment oversight, such as the requirement to register a hedge fund with the SEC, has long been touted as one of the best ways to increase transparency and expose the inner workings of a hedge fund to the harsh light of day.  Although SEC registration remains voluntary (for the time being), the fact that half of all hedge funds have registered is surely a good thing, right?  As regular readers know, previous regulatory transgressions (as reported on the firm’s Form ADV) are a modest predictor of future problems (see previous post).

But what if the only funds that register are the ones with nothing to hide?  That’s what Nicolas Bollen of Vanderbilt University and Veronika Pool of Indiana University wondered.  They hypothesized that you may be able to predict future regulatory or legal transgressions based on something far more ubiquitous than Form ADV’s:  performance figures.  In their March 2010 paper “Predicting Hedge Fund Fraud with Performance Flags,” the vexillologist duo test this hypothesis. More…

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