Internal Controls for Hedge Funds
How Hedge Funds Employ Different Internal ControlsThere was a recent study conducted on hedge fund auditing and oversight practices, specifically, why do hedge funds use different internal controls? The study showed funds use greater internal controls to comfort their investors. Conversely, some funds use less internal controls because they do not want to expose their investing positions to outside oversight. The level of internal controls also translates into higher fees. How hedge funds use internal controls is a critical issue today as more hedge funds incorporate more sophisticated auditing and oversight practices. In the following video, one of the study's authors, Wharton Professor Gavin Cassar, shares some of the most surprising findings.
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Professor Cassar cites a number of examples of internal controls in the hedge fund industry. He finds that offshore hedge funds have better internal controls than U.S. onshore hedge funds. Another conclusion is that hedge funds with better internal controls charge a higher fee. Those hedge funds using a short-selling strategy will also use less auditing and oversight practices. This may be because hedge funds holding a short position want to limit the chances of an outsider taking advantage of this knowledge with a "short squeeze." Contrary to popular belief, younger hedge funds employ greater internal controls than experienced hedge funds. This may be a way of compensating for the lack of experience and better oversight may entice wary investors.
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