Nearly half (46 per cent) of hedge fund professionals believe their competitors engage in illegal activity, more than one third (35 per cent) have personally felt pressure to break the rules, and about one third (30 per cent) have witnessed misconduct in the workplace, according to a survey commissioned by law firm Labaton Sucharow and the Hedge Fund Association.
When asked if they would blow the whistle or report the misconduct, 87 per cent of respondents said they would report wrongdoing given the protections and incentives such as those offered by the SEC Whistleblower Program. This investor protection programme has broad extraterritorial reach and offers eligible whistleblowers, regardless of nationality, significant employment protections, monetary awards and the ability to report anonymously. To ensure that adequate funds are available to pay awards, Congress has established a replenishing Investor Protection Fund, which currently has a balance in excess of USD450m.
"While wrongdoing in the hedge fund industry may not be as widespread as many outside the industry believe, it does occur, and people in the industry are aware of it," says Christopher Clair, managing editor at Hedgeworld. "It's only when we eliminate the unfair advantages sought and exploited by some that true alpha can be found."
"The high percentage of hedge fund professionals that are aware of the SEC Whistleblower Program and are willing to report wrongdoing is extremely encouraging," says Jordan Thomas, chair of the Whistleblower Representation Practice at Labaton Sucharow. "Without individuals willing to report possible securities violations, internally or externally, responsible organisations and law enforcement authorities cannot police the marketplace effectively and efficiently."
The survey's top ten findings include:
• 46 per cent of respondents reported that their competitors likely have engaged in unethical or illegal activity in order to be successful.
• 35 per cent of respondents reported feeling pressured by their compensation or bonus plan to violate the law or engage in unethical conduct, while 25 per cent of respondents reported other pressures that might lead to unethical or illegal conduct.
• 30 per cent of respondents reported that they had personally observed or had first-hand knowledge of wrongdoing in the workplace.
• 87 per cent of respondents would report wrongdoing given the protections and incentives such as those offered by the SEC Whistleblower Program, while 83 per cent of respondents were aware of this important program.
• 29 per cent of respondents reported that it was likely that they would be retaliated against if they were to report wrongdoing in the workplace.
• 28 per cent of respondents reported that if leaders of their firm learned that a top performer had engaged in insider trading, they would be unlikely to report the misconduct to law enforcement or regulatory authorities; 13 per cent of respondents reported that leaders of their firm would likely ignore the problem.
• 54 per cent of respondents reported that the SEC is ineffective in detecting, investigating and prosecuting securities violations.
• 34 per cent of respondents reported that recent regulation and law enforcement scrutiny will weaken the hedge fund industry.
• 13 per cent of respondents reported that hedge fund professionals may need to engage in unethical or illegal activity in order to be successful and an equal percentage would commit a crime - insider trading - if they could make a guaranteed USD10m and get away with it.
• 93 per cent of respondents reported that their firm put the best interests of investors first.
"Our members have a deep commitment to corporate integrity," says Lara Block, executive director of the Hedge Fund Association. "Although some of the findings are troubling, this groundbreaking survey provides valuable insights that will help the industry to further strengthen its investor protection programmes and root out any bad actors."