Thursday, June 07, 2012

Chairman Schapiro Lauds SEC’s Use of Aberrational Performance Inquiry in Detecting Hedge Fund Fraud


The SEC Aberrational Performance Inquiry initiative to combat hedge fund fraud is working well, said Chairman Mary Schapiro at a recent SEC Historical Society event. The aberrational behavior inquiry uses risk models to identify hedge funds worthy of further review. More specifically, under the Aberrational Performance Inquiry initiative, the SEC uses proprietary risk analytics to evaluate hedge fund returns. Performance that appears inconsistent with a fund’s investment strategy or other benchmarks forms a basis for further scrutiny.


Chairman Schapiro noted that six SEC enforcement actions have been engendered from the initiative. The Chair also noted that, in addition to the SEC, regulators in 17 countries are using risk analytics to pro-actively detect hedge fund fraud earlier and protect investors.

As explained recently by Robert Khuzami, Director of the Division of Enforcement, the Commission is using risk analytics and unconventional methods to help achieve what the Director called the holy grail of securities law enforcement, which is earlier detection and prevention. This approach, especially in the absence of a tip or complaint, minimizes both the number of victims and the amount of loss while increasing the chance of recovering funs and charging the perpetrators.