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June 30, 2003

A Black Eye From Tricksters

By Staff Reports

They are attracting some of the biggest scam artists in modern times.

It is not surprising. For many years hedge funds have operated largely out sight of the regulators. And they provide the perfect vehicle for crooked traders who lust for the typical 20 percent cut of the profits that these funds make.

Still, one in five hedge funds collapses each year though not usually because the crooks were caught redhanded. Mostly, the traders made bad bets.

The Securities and Exchange Commission took 26 enforcement actions against hedge funds since 1998, nearly half of them since the middle of last year.

In May, the SEC convened a roundtable to look closer at hedge funds. The SEC has been examining the operations of 650 hedge funds which manage some $162 billion in assets.

Despite the new regulatory scrutiny, most hedge funds operate within the law and are honest. It partly explains why hedge funds, a lightly regulated sector, have amassed some $600 billion in assets. And the hedge fund flow is expected to triple over the next decade. Another explanation for this flow of money is the potentially outsized returns associated with these funds. Hedge funds can engage in various types of strategies and use leverage.

One of those famous strategies is, of course, short selling.