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In light of SAC pleas, how to spot too good to be true funds

by | Nov. 5, 2013, 12:17 PM

SAC Capital is a “classic example” of a hedge fund with a performance that was “too good to be true,” says Nick Bollen, a finance professor at Vanderbilt’s Owen Graduate School of Management.

Nick Bollen (Vanderbilt)

The giant hedge fund agreed to plead guilty to criminal charges of insider trading Nov. 4 and pay a $1.8 billion fine. Six former SAC employees have pleaded guilty to insider trading and two others are fighting similar charges. SAC is run by billionaire Steven A. Cohen.

Bollen can talk about how to spot potential hedge fund cheaters.

“In a 2012 study of hedge fund fraud cases, I found that the probability of a trading violation had a strong positive correlation with the level of a fund’s returns,” Bollen says. “Thus it is not surprising that a firm delivering 30 percent per year for two decades was generating at least some of those returns using inside information.”

Bollen laid out some tips to catching hedge fund cheaters in a 2011 Vanderbilt magazine article.

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