A big shake out of the hedge funds sector could be on the way, according to offshore law firm, Walkers. Guy Locke, head of insolvency and...

A big shake out of the hedge funds sector could be on the way, according to offshore law firm, Walkers. Guy Locke, head of insolvency and recovery at the firm, points to a definite rise in troubled funds in the last six months, coinciding with phenomenal growth. “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,” he told the local Cayman Island press. Mr Locke has been working on three high profile funds where investors suffered from fraudulent valuations: Beacon Hill, Philadelphia Alternative Management and Bayou. One problem identified by Mr Locke is when an investment manager assigns an incorrect net asset value when investors subscribe for or redeem their shareholdings. This ultimately it creates more problems for the existing shareholders. Hedge funds’ combination of using complex financial instruments and investment managers who misrepresent net asset values can create “a mess”, according to Mr Locke.