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How to make sure you don’t invest in yet another Enron

Thursday, 5th July 2007

IT'S déjà vu all over again: this week, another hedge fund manager pleaded guilty to fraud. The activities of Keith Gilabert, the founder of a fund called GLT Venture Fund, cost investors about $14m (£7.8bn, E11.3bn). This was just a skirmish, however, compared to the spectacular collapse last August of Bayou Capital Management, which took with it $350m in investors' funds. In both cases, the losses were not due to anything like high-risk derivative investment structures: the cause was old-fashioned, outright fraud.

IT'S déjà vu all over again: this week, another hedge fund manager pleaded guilty to fraud. The activities of Keith Gilabert, the founder of a fund called GLT Venture Fund, cost investors about $14m (£7.8bn, E11.3bn). This was just a skirmish, however, compared to the spectacular collapse last August of Bayou Capital Management, which took with it $350m in investors? funds. In both cases, the losses were not due to anything like high-risk derivative investment structures: the cause was old-fashioned, outright fraud.

In breaking the Bayou story, the Wall Street Journal found lawsuits dating back several years indicating a pattern of bad-faith dealing. In the case of GLT, investors continued to put money into the fund throughout 2004 without knowing that the parent company's investment adviser registration had been revoked the previous year.

In both cases, the relevant data were available long before the funds collapsed. For those who knew where to look and how to analyse what they found, it was actually easy to avoid a loss in Bayou or GLT by never investing in the first place.

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