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Red flags at hedge funds that worry experts

Date: Friday, November 21, 2008
Author: Svea Herbst-Bayliss, Reuters.com

Forensic accountants, former prosecutors and private investigators list some potential red flags at hedge funds that might indicate irregularities and should make investors take notice and probe further.

*Returns that seem too good to be true. If a fund is reporting spectacular returns at a time most of the industry is suffering, industry experts urged investors to be skeptical and dig below the top line numbers.

*Sudden delays in getting information: If monthly statements arrive much later than usual or not at all, experts said it is time to ask more questions.

*Implausible excuses for delays in getting information: If managers say their computer systems have been down for days and they ignore email messages, experts said they would worry.

*Stonewalling at requests to visit: This could mean that the managers sold off all the office furniture and left behind a receptionist to answer calls.

*A sudden wave of departures: Experts suggest interviewing people who left because they might know if anything unusual is going on.

*A sudden shift in investment philosophy: If your long/short equity hedge fund sudden dabbles in commodities and waits weeks to tell you about it, start to worry, the experts said.

*Big unexplained expenses: Question any sharp moves in management fees or other things. It could indicate that managers might be funneling money elsewhere, the experts said.

*An inordinate amount of extremely expensive toys: Industry experts said a spending spree on antique Ferraris might be worrying unless the managers are extremely successful and wealthy.

*Building of a enormously-sized first or second homes: Industry experts worry that the manager might spend more time thinking about drapes than his investment positions.

*Divorce: This could be very messy, industry experts said, adding a breakup could cost the manager a lot of money and emotional energy.

*Inappropriate experience among managers: Check resumes and references carefully, industry experts said warning, for example, that dentists, recent college graduates or even economists at Wall Street banks might not have the requisite experience to run a hedge fund.

(Reporting by Svea Herbst-Bayliss; Editing by Bernard Orr)