Hedge Fund Tech: AIRAS And The SEC’s New API

New York (HedgeCo.net) – Axiom Valuation has released a new platform for hedge funds to avoid the SEC’s new screening tool, Aberrational Performance Inquiry (API), which identifies possible fraudulent valuations and misreported returns by hedge fund managers reporting above benchmark returns.

“For a hedge fund seeking to avoid being subject to the SEC’s API process, Axiom Valuation’s AIRAS capability can protect the fund from a possible SEC API by demonstrating through a quantitatively robust and empirically defensible report that the fund’s self-reported returns match the fund’s strategies.” The company said.

Last week’s SEC announcement of enforcement actions against three hedge funds and six individuals for misconduct including improper use of fund assets, fraudulent valuations, and misrepresenting fund returns, demonstrated a ground-breaking shift in the operating environment for hedge funds.

These are the first actions brought by the SEC using their new API capability, which utilizes proprietary risk analytics to test hedge fund’s self-reported returns against the fund’s investment strategy or other benchmarks.  For the first time, the SEC has an analytical and information advantage over the hedge funds it regulates.

The SEC is casting a wide net across all hedge funds that are reporting performance of greater than 3% above market indexes, according to testimony by Robert Khuzami, Director of the Division of Enforcement for the SEC in March, 2011.  This means that most successful hedge funds will be targeted for at least some degree of further scrutiny by the SEC’s API process.  This scrutiny cannot be good news for hedge funds in terms of management time, legal costs, and reputational risk.  In essence, these successful hedge funds are guilty until proven innocent.


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