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Regulate hedge funds: it's impossible to separate charlatans from talented wizards.

Publication: The International Economy
Publication Date: 22-SEP-08 		Format: Online
Delivery: Immediate Online Access

Article Excerpt
Imagine that you are shopping for a high-performance car, but that you are not allowed to look under the hood. What's inside is a secret. Furthermore, you cannot find out how similar vehicles have performed, because there are none. Finally, the car carries no warranty. The same logic applies to hedge funds: investors are typically not allowed to know how they work, and no warranties are offered. Moreover, hedge fund managers can easily "fake" high performance without getting caught.

To see how high performance can be faked, consider a fairly rare event, such as the Standard & Poor's 500 index falling by more than 20 percent in the coming year. Such...

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