‘Funds of Funds’ Face Scrutiny of Scrutiny

In addition to its ramped-up look at possible flimflammery leading up to Lehman Brothers’ historic bankruptcy, the Securities and Exchange Commission is training a keen eye on funds of funds, investment funds that allocate investor dollars across groups of hedge funds, The Wall Street Journal reports.

The SEC is looking at about a dozen funds of funds as part of a “sweep exam,” wherein the commission collects information on companies to develop leads. Such a survey doesn’t necessarily mean that anything illegal took place.

The Journal says that the SEC is using the funds of funds as a means to secure more information by finding out which hedge funds were considered but ultimately rejected by funds of funds. Another avenue for attack: Some funds of funds allow employees who have intimate knowledge of the workings of hedge funds to trade in the market, a scenario that could be conducive to front-running, the practice of placing orders on the market ahead of a major investor. ‘Funds of Funds’ Face Scrutiny of Scrutiny