Cayman Net News – Along with the phenomenal growth of hedge funds, there has also been a steady rise in funds collapsing as well.

The Head of the Insolvency and Recovery at local legal firm Walkers, Guy Locke, said that there has been an expectation of big shake out in the hedge funds sectors and there has been a definite rise in troubled funds in the last six months. 

“The nature of the business means we have complicated portfolios,” said Mr Locke.

“We have found that what tends to happen in a number of cases is that a fund starts to lose money and some investment managers try to cover up the losses by inflating values in the portfolio, which perpetuates itself until it gets to the stage where it can’t continue anymore and the funds collapse.”

For example he said that an investment manager assigns an incorrect net asset value where people are subscribing and redeeming their shareholdings. So an investor will buy a share that is said to be worth a dollar but it is actually worth 30 cents, then the share is redeemed for a dollar and ultimately it creates more problems for the remaining investors that are still holding onto their shares.

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