This time an MIT professor and his son have been fined $4.8 million for committing hedge fund fraud. What, no jail time?
According to TheTech, they misrepresented their historical performance by using back tested instead of real results and hide the true nature of underlying losses:
However, the SEC said that the supposed track record was not based in reality, but rather on “back-tested hypothetical simulations,” particularly “hypothetical historical allocations to six hedge fund managers.” Additionally, despite the promise to use Gabriel’s model to trade liquid securities, most of the fund was actually invested in “illiquid investments in other hedge funds” — including funds managed by Bernard L. Madoff — and did not make use of the optimal pricing model.
What is most interesting about this case is that a bunch of fraudsters invested in another fraudster. So much like the subprime bubble where we had CDOs squared or CDOs that invested in other CDOs, here we have fraud squared. Frauds investing in frauds.
Hedge funds can be great investments, but cases like this just make me scratch my head.