The risk that hedge funds will defraud investors is lower in Europe than in the United States, because most European hedge funds turn to independent administrators to value their books, hedge fund analysts said.
A lack of independent valuations contributed to the high-profile failure earlier this year of the US-based Bayou Group hedge fund. Its founder and chief executive pleaded guilty to fraud by misrepresenting the value of assets, in a scheme prosecutors said cost investors $450 million.
"You should be wary of self-administered funds ... That's where the danger is," said Derek Stewart, a director of Mellon Global Alternative Investments.
In Europe there have been no major failures in recent years, because hedge funds normally use independent administrators, even though it is not a legal requirement. Over the years it has become a standard industry practice, which investors have come to expect.
"Hedge funds outside the United States without independent fund administrators are unlikely to have any serious investors," said Joe Seet, senior partner at Sigma Partnership, a specialist hedge fund advisory firm.