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SEC Shines Spotlight on Crooked Hedge Funds

“Too-good-to-be-true” hedge funds are now undergoing intense scrutiny courtesy of the Securities and Exchange Commission (SEC) and a new computer system designed to analyze funds whose over-the-top performance could potentially indicate fraud.

The SEC began developing its computerized hedge fund analyzer in 2009; today it analyzes monthly returns for thousands of hedge funds. Officials at the SEC are keeping mum on exactly how the system works, but several civil-fraud lawsuits have been filed as a result of the effort.

One hedge fund that was sued by the SEC reported annual returns of more than 25% by allegedly overvaluing its assets, according to a Dec. 27 article by the Wall Street Journal. Another civil-fraud lawsuit involves ThinkStrategy Capital Management LLP and its Capital Fund-A hedge fund.

In 2008, Capital Fund-A reported a 4.6% return for the sixth year in a row. In comparison, the average hedge fund fell roughly 19% in 2008, with losses in eight of the year’s 12 months, according to data from Hedge Fund Research.

In a reality, Capital Fund-A hedge fund actually had a 90% loss in 2008, according to the lawsuit filed by the SEC against the hedge fund’s manager, Chetan Kapur.

As reported in the WSJ article, the SEC alleges that Kapur continued to report positive returns for the Capital Fund-A hedge fund even after it was liquidated and ceased trading in order to attract investors to his other funds. The SEC also claims that Kapur repeatedly inflated his firm’s assets under management in investor reports and invented a nonexistent management team.

Without admitting or denying wrongdoing, Kapur agreed to a lifetime ban from the investment industry. A federal court will later decide on penalties in the case.

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