August 28, 2005
Another Hedge Fund Fraud
The Bayou Group, a $400 million hedge fund, is not returning phone calls. The street scuttlebutt is that the fund was a giant accounting fraud. We will hear much more about this. There will be calls for more hedge fund regulation, calls we should resist. The fund did put up some red flags: They used their own brokerage office and the accounting firm for the brokerage unit was different from the accounting firm used on the fund's financial. Government regulations cannot stamp out all securities fraud ex ante-- some will always exist and require ex post prosecution. Excessive government regulation over structures the markets and gives investors the false illusion of security. Investors may come to rely too heavily on the government as nanny. When people give others their money to invest they need to learn to be very, very cautious. The Bayou Fund promised huge returns (30% in its first year and 38% in its second) and did not take management fees (only a carry of 20%). The manager bragged that a the fund did not use leverage to make money and was diversified to boot. It sounded too good and it was.
August 28, 2005 | Permalink
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