Hedge fund fraud risk certification launched

Date: Tuesday, June 2, 2009
Author: Hedgeweek.com

The investment industry's first hedge fund fraud risk certification has been launched by Protean Fraud Risk Appraisal, an independent risk certification firm specialising in the alternative investment sector.

Protean Fraud Appraisal Certification provides hedge funds and other managers with the means to demonstrate that their fund represents a low fraud risk. It combines the disciplines of insurance risk underwriting with traditional due diligence techniques and a proprietary historic fraud loss analysis tool.

Protean Fraud Risk Appraisal is an affiliate of Protean Investment Risks, which specialises in the provision of insurance products to protect investors against hedge fund fraud. Protean Fraud Risk Appraisal's risk assessment process leverages the proprietary underwriting process based on historic fraud loss data developed by PIR.

Nathan Sewell, partner, Protean Fraud Risk Appraisal, says: "The priority at this time for managers and investors alike is confidence. PFAC enables hedge fund and other managers globally to provide evidence that they are a low fraud risk bringing increased confidence to both new and existing investors. PFAC is highly cost-effective and requires a minimal time investment by the hedge fund manager.

"The certification supports the investment industry's gravitation to higher standards and best practice. Despite the increasing number of providers of investor due diligence, examination of hedge fund fraud risk has not played a role in the due diligence process to date as there has been no means to efficiently assess it. The approach developed by PFAC enables investors to use the certification as an integral part of their investment decision-making."

PFAC uses a detailed evaluation process designed to determine a fund's risk exposure to fraud. The initial data gathering process - in the form of the PFAC questionnaire - has been developed using a proprietary historic fraud loss analysis and a 'red flag identification matrix'. The matrix identifies key risk areas based on individual hedge fund data.

The certification's due diligence includes on-site visits and background checks using specialist providers to cover UK, US and other regions.