The risk of hedge fund fraud is lower in Europe than in the US, according to a report by Reuters. This is because most European hedge funds ...

The risk of hedge fund fraud is lower in Europe than in the US, according to a report by Reuters. This is because most European hedge funds use independent administrators for valuation purposes. The high-profile deception and failure earlier this year of the US-based Bayou Group hedge fund was allowed to develop over a number of years as it was able to cover its tracks by using a fake accounting firm to audit its financial statements. The firm lured investors to commit some $300 million by overstating returns and concealing losses since 1998. Bayou was able to report assets of $192 million and trading profits of $27 million at the end of 2003 when the truth was it had a value of $53 million and had lost $35 million. There have been no comparable hedge fund failures due to fraud in Europe in recent years because it has become industry practice for hedge funds there to use independent administrators, even though it is not a legal requirement. New hedge fund registration rules in the US in 2006 will force many local hedge funds to change the way they are valued, and that will mean more independent oversight, said the report.