First certification launched for hedge funds to demonstrate low fraud risk

1 June 2009

The investment industry's first hedge fund fraud risk certification has been launched by Protean Fraud Risk Appraisal, an independent risk certification firm specialising in the alternative investment sector.

Protean Fraud Appraisal Certification (PFAC) provides hedge funds and other managers with the means to demonstrate that their fund represents a low fraud risk, thereby bringing renewed confidence to investors. PFAC combines the disciplines of insurance risk underwriting with traditional due diligence techniques and a proprietary historic fraud[1] loss analysis tool.

Protean Fraud Risk Appraisal is an affiliate of Protean Investment Risks (PIR). PIR specialises in the provision of insurance products to protect investors against hedge fund fraud. Protean Fraud Risk Appraisal's risk assessment process leverages the proprietary underwriting process based on historic fraud loss data developed by PIR.

Nathan Sewell, Partner, Protean Fraud Risk Appraisal said:

"The priority at this time for managers and investors alike is confidence. PFAC enables hedge fund and other managers globally to provide evidence that they are a low fraud risk bringing increased confidence to both new and existing investors. PFAC is highly cost-effective and requires a minimal time investment by the hedge fund manager.

"The certification supports the investment industry's gravitation to higher standards and best practice. Despite the increasing number of providers of investor due diligence, examination of hedge fund fraud risk has not played a role in the due diligence process to date as there has been no means to efficiently assess it. The approach developed by PFAC enables investors to use the certification as an integral part of their investment decision-making.

"We are seeing strong interest in the certification and are confident that PFAC will provide comfort to investors wishing to benefit from the advantages of hedge fund strategies while helping funds assure existing and potential investors of their sound practices."

PFAC uses a detailed and sophisticated evaluation process designed to determine a fund's risk exposure to fraud. The initial data gathering process - in the form of the PFAC questionnaire - has been developed using a proprietary historic fraud loss analysis and a 'red flag identification matrix'. The matrix identifies key risk areas based on individual hedge fund data.

The certification's due diligence includes on-site visits and background checks using specialist providers to cover UK, US and other regions. The underwriter risk review is an integral feature, consolidating all aspects of the research. The PFAC underwriter is a highly experienced crime insurance expert.

The Protean Fraud Risk Appraisal team has more than 100 years combined experience in the hedge fund and insurance sectors.

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