Year

2013

Degree Name

Doctor of Philosophy

Department

School of Accounting, Economics and Finance

Abstract

The mandate to regulate the hedge fund industry in Australia is motivated by the need to protect retail investors and the requirement to maintain market integrity while not impeding economic growth. As such, regulators have taken a light touch supervisory approach based on the premise that the hedge fund sector is not a large portion of the Australian funds management industry and hence, does not pose a risk to the financial system. This assumption is contingent to the theory that hedge fund investment activities are carried out with no link to the unregulated shadow banking system and the prevalence of dark pools, where transparency is limited and risks cannot be easily detected or appropriately quantified. However, a key issue which has been overlooked is the ability of hedge fund managers to conduct investing activities under the purview of regulators facilitated by the evolution of financial innovation which enables fraud risks posed by rouge hedge fund managers to evade detection.

This thesis examines the effectiveness of the regulatory framework governing the hedge fund industry in Australia and its ability to mitigate fraud. The collapse of Trio Capital Limited in 2009 identified gaps within this regulatory architecture which had failed to protect certain retail investors against huge financial losses. Further, a future mandate to increase disclosure of hedge fund activities to mitigate fraud may prove to be less than effective if the information provided is too complex to understand and articulate and will serve little purpose in mitigating the risks of fraudulent conduct pertaining to the operational activities within hedge funds. The findings of this thesis suggest that a positive way forward is to promote the employment of independent hedge fund administrators proficient in forensic accounting analytics based on the assertion that active asset management requires active due diligence in an environment where investing in illiquid assets and valuation mismatches are the norm.

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Unless otherwise indicated, the views expressed in this thesis are those of the author and do not necessarily represent the views of the University of Wollongong.