Hedge Fund Fraud

Hedge funds have the features of lower transparency and less regulation. Accordingly, it is no surprise that fraud cases could happen from time to time.

Last week SEC charged a San Francisco hedge fund manager with defrauding investors by dramatically overstating the fund's profitability and misusing fund assets. It alleged that Alexander James Trabulse sent account statements to investors in his Fahey Fund that inflated the fund's returns by as much as 200%, while using investor money to purchase cars and finance shopping sprees for his family members.

According to SEC, Trabulse founded the Fahey Fund in 1997 and raised about US$10m from approximately 100 investors. He told investors the fund invested in financial instruments like stocks, derivatives, and foreign currency. Trabulse lured investors by touting the fund's spectacular performance, when in reality the statements he provided to investors bore no relation to the fund's actual performance.

Trabulse also misused fund assets to pay for a wide variety of personal expenses, using the fund's bank account to pay for cars, a home theater system, and his ex-wife's overseas shopping allowance. He even gave one relative free reign to use the fund's bank accounts for personal use.

In the past participation in hedge funds was limited to high net worth individuals, where the regulators could find an excuse for not directly supervising them. While such kind of products has been prevailing in the retail market, this incident makes an alarm.