U.S. prosecutors are investigating one of Wall Street’s darkest markets, focusing on hedge funds suspected of inflating the value of debt securities in their portfolios to juice the fees they collect.
Bloomberg News reports that having prosecuted traders who lied to customers about bond prices, the government is now scrutinizing hedge funds that allegedly solicited bogus price quotes from brokers, according to three people familiar with the matter who asked not to be identified. Such a practice would have enabled the funds to pump up the value of illiquid securities on their books.
The incentive to manipulate valuations has become more pronounced as investors have abandoned hedge funds because of poor returns and high fees. Assets managed by hedge funds declined last year for the first time since the financial crisis, with investors yanking more than $70 billion, according to Hedge Fund Research Inc. The opacity of certain parts of the debt market, with illiquid, sometimes distressed securities, had made it a prime target for deception because of the difficulty of determining prices.
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