SEC Uses Outlier Returns to Identify Risky Hedge Funds
The SEC filed three enforcement actions against hedge funds resulting from its â€œAberrational Performance Inquiry,â€ which uses â€œproprietary risk analyticsâ€ to evaluate hedge fund returns. According to the SEC, the Enforcement Divisionâ€™s Asset Management Unit seeks to identify performance â€œthat appears inconsistent with a fundâ€™s investment strategy or other benchmarksâ€ and commence further scrutiny. Robert Khuzami, the SECâ€™s Director of Enforcement, said that the initiative is designed to earlier detect and prevent securities law violations. The underlying complaints involve overstating performance, exaggerating qualifications, manipulating the valuation process, and undisclosed conflicts of interest.
OUR TAKE: We are not surprised that the SEC would use outlier returns to identify possible issues. We can only guess about its â€œproprietary risk analytics.â€ As more hedge fund managers are now under SEC supervision, careful attention should be paid to performance calculation and presentation under the Advisers Act.