Letter to the Editor: Wall Street Journal: Auditors of Hedge and Private Funds are Not Validating NAVs

“Sophisticated institutional investors still insist on believing in the Tooth Fairy that can somehow miraculously provide market beating returns for everyone. May be that is the biggest crime of all” (Behind the High- Pressure Hedge Fund Culture” (WSJ, July 25, 2013)).   Chasing after returns is not greatest crime of all. Many hedge funds have the capacity to exploit inefficiencies in the market and do so. What is a shame is that endowments, pension funds and foundations in addition to their agents do virtually no due diligence as to whether the returns and NAVs are fraudulently reported.  Investors believe that when hedge funds provide audited financials to them that the NAVs shown have been vetted by the auditors. They have not. Hedge fund auditors “presume” the NAVs are correct and audit whether the investment process used by the manager to establish the NAVs is reasonable.  This is a very low standard.  We know this because Madoff feeder funds were blessed by reputable audit firms. The consultants offer performance evaluation services but the returns used in this analysis are self-reported and for all we know fraudulent.  The crime is that investors live under an illusion that they are covered while the auditors and consultants reinforce the fantasy since it is not in their interest to do otherwise.  The fact remains that there are analytics in place that investors can use to test whether a manager is a Madoff clone.  The fact that the SEC is currently using its data mining ABI (Aberrational Performance Initiative) to ferret out fraudulent managers should be enough of anW incentive for investors to finally wake-up.

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