Novel mitigators of hedge fund managers' fraud

This article aims to contribute to the limited pool of solutions designed to deter or mitigate hedge fund manager fraud and reduce the associated costs to investors and other hedge fund industry stakeholders. The methodology involves presenting three hedge fund indsutry fraud cases, focusing on their final legal outcomes and the key lessons learned. These cases illustrate how investors and industry stakeholders often suffer significant financial and reputational losses.

Drawing from these cases, the article identifies several less conventional but potentially effective mitigators of manager fraud, including: Conducting ongoing, intrusive (as opposed to standard cursory) due diligence on hedge funds; Expanding due diligence to include an examination of the hedge fund's relationships with its vendors; Collaborating with the insurance industry to develop fraud-specific hedge fund insurance policies; Investing through separate managed accounts, allowing investors direct ownership of the underlying securities; Investing in hedge funds whose vendors are large, reputable, and financially strong; and Promoting the development and application of industry-wide best practices for conducting due diligence and communication.