The research used confidential data from 444 due diligence reports commissioned by investors from 2003 to 2008: a team at Stern analysed the extent to which hedge fund managers’ representations about their funds varied from the facts.

The findings will be troubling to the wealth management industry in the wake of the Bernard Madoff Ponzi scheme scandal, in which Mr Madoff - now jailed - deceived individuals and institutions about his funds. The saga has put pressure on intermediaries to devote more time and resources to making due diligence checks on potential investments. Even where criminal activity is not an issue, the recent credit crunch has highlighted the need for stringent checks on hedge fund performance and their terms and conditions.

Managers most commonly misrepresented the amount of money they had entrusted to their funds, their performance and their regulatory and legal histories, according to the research.

The research identified “noted verification problems” – defined as “misrepresentations or inconsistencies” – in 42 per cent of due diligence reports.