Research condemns hedge fund managers

The research is a further blow to the credibility of an industry that has striven to shake off a reputation for opacity and, in some cases, dishonesty in the wake of Bernard Madoff's $50bn (£30.7bn) fraud.

Neil Mirchandani, a partner in the funds litigation team at law firm Lovells, said there was a "risk of claims" coming out of these "possible misrepresentations".

But he stressed it was unclear from the research, which contained no named examples, whether claims would be worth following up.

The team of academics, which included professors at New York University's Stern School of Business and the Yale School of Management, analysed nearly 450 hedge fund due diligence reports provided by Hedge Fund Due Diligence, a third-party research company.

The reports, which covered the period 2003-08, were commissioned by major investors who were considering allocating money to the funds, but did not find the information offered by the manager sufficient.

Forty-one per cent of the funds in the sample had faced some form of legal or regulatory problem, such as being the defendant in a legal dispute.

Of these, more than half - 21 per cent of the total sample - misrepresented what these problems had been in the formal due diligence process, they found.

In 15 per cent of cases, managers either totally or partially failed to disclose problems they had faced, although they knew the analysts were being paid to verify their statements independently.

The report also identified a "surprising" level of discrepancy between performance and asset data provided by the hedge fund managers and information sourced from a third party.

One in 20 managers claimed performance figures that disagreed with independent sources, and the data could not be independently checked in a further 9 per cent of cases.

The discrepancies were even more marked for asset levels, with one in 10 managers giving data that conflicted with other sources.

Verbal recall proved another problem, with a full 20 per cent of managers giving inaccurate information in interviews conducted as part of the due diligence process.

One manager's verbal assets under management figure was more than $300m higher than the actual number, the academics noted.

The research also included data on what investors might perceive as "operational risks" typically associated with hedge funds, including lock-up and redemption periods and self-pricing.

It allocated a figure of 1 to portfolios that were priced entirely by external providers and a zero to funds that were valued by the managers themselves - a method that "has obvious potential for downright fraud, if employed by an untrustworthy manager", said the authors of the report.

The average figure for the sample was 0.65.

The research appeared to confirm the hedge fund sector's reputation for obfuscation. But some commentators chose to remain upbeat.

"This suggests four out of five hedge fund managers are honest," said Mr Mirchandani.