I made it a rule a long time ago, that I would only market and invest in hedge funds that use independent third party administrators. My decision was simple, with no one watching over the firm's performance and independently verifying it on a month to month basis, how could I trust the integrity of the information coming out of the firm? In addition, if they were performing their own accounting monthly, how could I be confident that they are capable of complying with GAAP? Or that they understood accounting at all?
We all know that hedge fund fraud is rampant in the hedge fund industry. Not a day goes by where we don't read about a new hedge fund manager going to jail, hiding in the woods, or taking little old ladies and charities for their last pennies. As a result of the fraud, hedge fund investors are fuming. However if they followed the same rule I have, investing in a fraudulent hedge fund becomes less of a possibility. Let's talk about how independent third party administration can help prevent fraud. First however, it is important to understand what administrators do.
Continued in Part Two of 'Hedge Fund Administration - Why It Is A Necessity!
FULL DISCLOSURE - HedgeCo Networks owns G & S Fund Services, a full service hedge fund administrator and administration firm. Evan Rapoport is a part owner and co-founder of HedgeCo Networks.