Where there’s smoke, is there fire? Some red flags in hedge fund fraud

Read the article in the Cayman Financial Review Magazine 

Sometimes investors lose some or all of their investments at the hands of frauds perpetrated through hedge funds. Because of the services KRyS Global provides, the firm is brought in to investigate these types of cases. Drawing from our varied and numerous experiences, we have identified certain red flags that we have seen in more than one situation and provide some practical guidance that investors may wish to consider to mitigate the risk of being victims of a fraud. 

Do you know and understand the investment strategy?

The hedge fund industry is continually growing and morphing, and the types of investment strategies are expanding. In the fraudulent funds that KRyS Global has been called upon to investigate, the firm has seen situations where the fund invested outside of its investment objective. This is referred to as strategy fraud (if intentional) or style drift (if not intentional). In other cases, the investor may never have fully understood the investment strategy.

The first issue is that strategy fraud or style drift can be tricky to identify.

One means of doing this is to analyse the audited financial statements, or detailed management accounts if the fund provides them more frequently.

The accounts can provide insight into the assets at a certain point of time.

As it is possible that the investment manager was in breach before or after filing the accounts, the position at the date of the accounts will give some assurance what the fund was invested in.

This can then be compared to the investment objectives, and possibly investment restrictions, to determine whether there is a strategy fraud or style drift.

The second issue is the ability to replicate the strategy, which investors should assess at the outset, before deciding whether to invest in the fund. If the strategy does not make commercial sense, it is a red flag that a fraud may be occurring.

Be wary of strategies too complicated to understand or that require a degree in brain surgery to explain. In addition, if the manager suggests that the investment strategy is proprietary, be sceptical as to what it is he may be trying to hide.

Do you know whom you are entrusting your money with?

The lack of due diligence by investors into the investment manager is one of the factors that we come across too often. Investment managers who either do not have the necessary qualifications or experience, who have previously been involved in shady activity or who show a tendency to lie can represent a serious red flag.

Before investors entrust money to a fund, they should conduct background checks on the key principals in the structure, verifying if possible the representations and credentials.

Finding out this type of information is usually relatively simple – a check on the internet. Most financial institutions have access to compliance databases. From these two sources, investors can gain access to publicly available information regarding any regulatory registrations, regulatory actions, media reports and court

Request a copy of the manager’s curriculum vitae and verify his education, experience and qualifications. If the investor is investing significant sums or has the resources to conduct further qualitative due diligence, an investor may want to consider gathering additional information directly from fund key personnel through questionnaires and meetings with fund managers.

In our minds, conducting this due diligence cannot be understated. In one case we were involved in, we learned that the fund we were investigating was the manager’s first stab in the fund industry. Previously he had been a dentist and, upon attending a fund conference, decided this was the way to go. Not surprisingly, the manager conducted a ‘root canal’ on the investors and wasted most of their funds.

Are the gatekeepers qualified, reputable and capable?

A further issue we often come across is one where the fund is using a third party service provider who lacks the qualifications, reputation and experience to conduct the role they are retained to do. Hedge funds usually take great care in the selection of service providers including prime brokers, administrator, legal advisors and auditor. A weakness in one of these links could suggest that the manager has found someone to collude with, or is intentionally selecting someone weak so he can perpetrate a fraud.

The fund’s service providers should be independent, reputable and adequately staffed with skilled and qualified professionals. Service providers that do not have these skills and resources either may lack the ability to detect the fraud and confidence to ask the tough questions, or if an issue arises, may not be willing to confront the manager on it.

Be extremely sceptical if there is a change in service providers. Successful funds typically maintain long-term relationships with service providers, and similarly service providers, given the investment they need to make, usually want a long-term relationship with the fund. While changes occur, for growth or market conditions, it is necessary that the investor receive an adequate explanation for the change. If not, this may be a red flag.

Who is checking the valuation of the assets?

Interestingly, at the heart of a lot of hedge fund fraud is the need to conceal losses. One easy way to do this is to inflate the value of the position of the fund’s investment portfolio. Over the years, we have seen multiple ways this has been achieved. Collusion with prime brokers, false revenue projections, false trading and the use of illiquid asset types just to name a few. In all of these, the common theme was the lack of an independent and qualified third party to value the fund’s assets. Many hedge funds give the manager significant discretion in valuing these asset types. When times get tough and a manager needs to find a way to conceal a big loss, this situation is a recipe for disaster.

Make sure you know who is going to conduct that independent valuation. Do not automatically think it is the independent director, administrator or the auditor. Normally they rely on the representations of the manager, who of course is the one wishing to conceal the losses. Moreover, while we are on this topic, another possible red flag is constant returns. Markets are volatile. Failing to see significant drops and waves in the fund’s net asset value could be a sign that the valuation of the fund is being intentionally manipulated.

We investigated a fund where the primary investment was the purported rights to bottle and distribute glacier water. What we found, however, was that no such business existed. Nonetheless, during the two to three years in which the fund operated, the value of the fund’s net assets had inflated by over 1,300 per cent. This arose because the investment manager had prepared numerous ‘back of a napkin’ projections of what revenues would be if the business ever got off the ground. As the net asset value increased, the manager paid himself a performance fee along with the investment fee, thus being able to skim out the liquidity in the fund for his personal benefit.

A lack of independent valuation of the asset allowed the fraud to persist. The independent directors did not verify the manager’s calculations, the administrator felt no obligation to make inquiries and the auditor relied upon the representation of management when conducting the audit. The ones who ultimately suffered were the investors.

Are you accessing and reviewing all the information you are entitled to?

One of the areas ripe for fraud in hedge funds is the use of related party vehicles for dealing with asset transactions or investing assets. While there can be good reasons for fund structures to engage in related party transactions, these types of transactions can also be vulnerable to fraud and be a red flag to investors. This can particularly be the case where the related party vehicle is located in an offshore jurisdiction.

It is not always easy to learn whether the fund manager is utilising related parties. A source investors can use to ascertain the existence of related party transactions is through a review of the audited financial statements of the fund. Under most recognised accounting standards, funds are required to disclose in the notes to the financial statements what transactions the fund has with related parties.

To the extent the audited accounts disclose such related parties exist, the investor should ask questions and request additional information from the investment manager and principals regarding the related party relationship, and understand how these transactions fit into the investment strategy or objectives of the fund. A lack of transparency in this regard is a sign that the related parties could be used to perpetrate a fraud. Investors may also inquire whether the funds have proper policies and procedures in place to address any conflicts of interest that may arise. A failure to have such policies and procedures can also be a red flag.

We started this article by explaining that the intent was to raise some red flags that investors will want to be sceptical about and provide some practical guidance that investors may wish to consider to mitigate the risk of being victims of a fraud. Comprehensive quantitative and qualitative due diligence cannot be understated.

Knowing who you are placing your money with and who is retained to act as the independent gatekeeper is paramount. Ask tough questions. Gain access to as much information as possible. Be sceptical and verify what you are told. Remember an ounce in prevention is worth a pound of cure. If it sounds too good to be true, it probably is. And if you suspect a fraud, don’t hesitate to retain the services of a good fraud investigator.


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Margot MacInnis
Margot has over 13 years of experience in the financial services industry. Currently, she is extensively involved in the liquidation of the Sphinx Group of Companies. Her experience encompasses cross-border insolvency, regulatory compliance, corporate recovery, risk management and use of technology to address corporate governance and policy objectives.
Margot MacInnis
Managing Director
KRyS Global
Governors Square, Building 6, 2nd Floor
23 Lime Tree Bay Ave.
PO Box 31237
Grand Cayman KY1-1205
Cayman Islands

T. +1 (345) 815 8404
[email protected]
Antoine Powell

Antoine’s work at KRyS Global has included court supervised and voluntary liquidations, as well as forensic investigations. Prior to joining KRyS Global, Antoine was employed as an auditor at one of the Big Four firms before working in the restructuring department of a financial advisory services firm.

Antoine Powell
Senior Analyst
KRyS Global
Grand Cayman
Cayman Islands

T:  +1 (284) 494 1768
E[email protected]KRyS-Global.com


KRyS Global


See our Profiles in the CFR eversion 

Boutique insolvency, fraud investigations and asset recovery firm KRyS Global expands into Europe with an office in Guernsey.  The firm also launches Ferret, a new product line of technology-based forensic and fraud investigations tools. Founder and Chief Executive Officer Kenneth Krys speaks about the news and the first five years of the firm. 

Only five years after its launch, KRyS Global today has around 60 employees in four offices in the Cayman Islands, the British Virgin Islands, the Bahamas and Bermuda.

In October they will be joined by a new office in Guernsey offering independent, boutique insolvency, fraud investigation and asset recovery services that have made the firm a success in the Caribbean offshore region.

Just like in other jurisdictions where the firm has a presence, the rationale for the move is that Guernsey is a top offshore jurisdiction and the market for large scale liquidations is dominated by the big accounting firms, says KRyS Global founder and CEO Ken Krys.

“In all of the markets, where we have a presence, there are firms that can do insolvency work and does it well, but they are not boutique firms that specialise in asset recovery and fraud investigations.”

While working with the Cayman Islands Monetary Authority, Krys says, he noticed few firms were truly independent and able to take on a large liquidation without having a conflict of interest.

Those conflicts could for example be that the accounting firms provided services to the company in question, that they audited service providers of the company or that they simply did not want to be in a position where they may have to criticise service providers or others who may refer work to them.

Starting KRyS Global was the opportunity to set up an independent, boutique firm focused on offshore fraud investigations that would not face such conflicts.

“What we have seen going into these jurisdictions is that the landscape has changed and people actually realise that insolvency firms or fraud investigating firms can add value,” says Krys.

“Having developed our network of offices and reputation in the Caribbean and having strong relationships with independent firms in Asia we considered an office in Europe made sense for the next phase of growth for the firm. We are sending a team, led by Tim Le Cornu, who is currently a director in the Cayman office, to use the skill sets that we have developed and expand that into Europe and some of the offshore centres there, starting with Guernsey.”


Although KRyS Global is often referred to as an insolvency firm, Krys explained that insolvency is often used only as a tool to recover assets. While the firm does a lot of insolvencies and restructurings, recovering assets is the firm’s key strength, explains Krys.

KRyS Global is perhaps best known for extensive hedge fund litigation and its work on such matters like Fairfield Sentry Ltd., in liquidation, the largest feeder fund invested in Bernard L Madoff Investment Securities LLC. After Krys was appointed by the BVI Commercial High Court as the liquidator of the Fairfield fund that invested into the Madoff Ponzi scheme, the fund, on application of Krys and the firm, was granted Chapter 15 foreign main proceeding recognition in the US, which, inter alia, has allowed it to pursue a cross border litigation strategy seeking to recover the clients’ investments.

In some cases this meant KRyS Global sought to recover payments which were made to redeemers before the bankruptcy of the fund on the grounds that such payments were recoverable by the fund and by the liquidator employing BVI statutory avoidance claims. This litigation is being closely followed by those in the fund industry and by other insolvency practitioners in the offshore world. “This is a good example of the creativity we implement to find alternative ways to try to maximise value for our stakeholders,” Krys says.

Part of the firm’s success is also due to the fact that “we don’t have the concerns about pursuing avenues of recovery, even when that may require bringing a claim against a potential client, an audit client or anyone who may refer work to us”, in contrast to the larger accounting firms which may not want to see other business lines compromised.

“I have a duty to go out and make sure that I try to get returns for stakeholders,” maintains Krys. The objective of a liquidator is to maximise recoveries and to distribute the assets to creditors and investors as promptly and efficiently as possible. For Krys, litigation is only a means to this end.

Krys does not pursue litigation lightly. Before pursuing any litigation, Krys obtains legal advice. If the litigation is being done in the context of liquidation, Krys consults with the committee of creditors and/or investors, and will then obtain court approval for the strategy, where appropriate.

“Resolving disputes outside expensive and uncertain litigation is always preferable. But a liquidator must always be prepared to go to trial if he files a claim.”


KRyS Global is almost always brought in when a case involves fraud or significant losses. The 2008 financial crisis and subsequent recession contributed to this, but Krys does not believe the recession was the only reason for the uptake in insolvencies since 2008.

It is rather that the recession caused liquidity issues, which led investors to be more diligent in regards to their investments and, in some instances, incented and/or compelled investors to seek to convert their investments to cash.

In some cases investors realised the assets were just not there or that they had been invested in instruments not covered by the investment mandate. Insolvencies were thus a consequence of these issues and, needless to say, resulted in attempts to recover assets, when other means proved unsuccessful.

“One of the things that we find interesting,” says Krys, “is that a lot of the issues which arose from 2008 are still out there”. For instance in some cases investment managers have done little to deal with assets since implementing protective measures, and in other instances directors and/or administrators have resigned. The remaining stakeholders may struggle to resolve the issues, because they don’t have the required voting rights, Krys says.

“Where these issues arise, the directors and investment managers are trying to find a mechanism for resolving the issues, but they just don’t have all the pieces or the authority to do so.”

As a result liquidators have to evolve and be on the lookout for new, innovative means of recovering assets. The insolvency and asset recovery space has changed considerably over the past 20 years, Krys says.

“Liquidators used to be people who did the audit or did the accounting. They were the senior partners in most of the bigger accounting firms.”

Today the market place has become a lot more sophisticated.

“Liquidators have to be forever thinking; have to be very vigilant and cost effective. One of the primary functions of the court is to make sure that liquidators are doing their job correctly, providing the level of service and the type of skill sets to justify the rates they are charging.”

There is an expectation that liquidators not assume a passive role that they take an active role in their estates, that they try and come up with creative and innovative ways of reaching resolutions and then distributing money back to creditors.

They also have to make investors and creditors part of the process, by allowing them to be heard. Much of the work of a liquidator involves communicating with the liquidation committee, composed of investor and creditor representatives, whose primary job it is to review the fees of the liquidator.

“That means critically looking at your time, determining whether that time should have been incurred, whether you have the right staff doing that work and then whether you are bringing value back to the estate,” Krys says. “There are some liquidation committees that we communicate with on a nearly weekly basis as to what we are doing.”


Most importantly in today’s environment, Krys says, “Liquidators have to be always thinking about new creative ways of recovering assets for an estate”. One example of this is how KRyS Global dealt with the claim the Madoff trustee Irving Picard had against Fairfield Sentry.

“We are one of the few offshore funds that entered into a deal with Mr. Picard. The reason for that is, says Krys,”to some extent because Fairfield Sentry was the most significant of offshore funds and the claim against it exceeded $3.2 billion”.

But part of the reason was also that Krys tried to devise a mechanism from which both parties would benefit. This involved going jointly through the assets and determining how to maximise the recovery of assets to the benefit of both estates.

“I knew that he was interested in some of the same parties as I was. We knew that in certain cases he had better tools to be able to pursue those claims than we did, because of the information he had access to.”

Given the early stages of the case at the time, it was a moot point whose individual claims on different parts of the law had more chances of success in litigation, so a split of the assets seemed sensible.

The largest obstacle in the negotiations was about $70 million of cash with Fairfield Sentry, which Picard wanted to recover for the Madoff estate. Krys did not see how he could get the BVI court to sanction the idea that $70 million of cash would be paid over to the apparent disadvantage of the stakeholders of the Fairfield Sentry estate.

Picard meanwhile had similar difficulties in explaining to his stakeholders why he would leave $70 million of cash untouched in a Madoff feeder fund.

Through a series of lengthy and extensive good faith negotiations, an arrangement was agreed where the cash was payable to the Madoff estate and in return Fairfield was given an allowed claim in the Madoff estate.


In addition to being creative, the importance of keeping at the cutting edge of technology, for example in fraud investigations, has become more important over time.

KRyS Global has extensively invested in technology during its first five years.

“I have been told numerous times that we have some of the best technology on the Island when it comes to how we deal with our investigations,” Krys says.

Internally the firm operates Share Point which allows it to be more efficient when it comes to archiving and searching documents and diarising items.

The technology focus also led the firm to launch its own product line of technology-based forensic and fraud investigation tools called ‘Ferret’.

Krys says for the past year the firm has seen more work in the areas of fraud, money laundering, corruption, large matrimonial disputes and trust disputes.

These types of cases often require use of large litigation databases and the ability to access deleted files, sift through large numbers of documents, emails or transactions and retrieval of data from text messages and other social media.

‘Ferret’ is going to be able to provide exactly those kinds of services to a target market of law firms – which are often the first parties alerted to a fraud – as well as to directorship firms and regulators.

The most important task will be educating people as to what they can do and what their opportunities are. “We need to ensure that they understand that when we do this work, we do so with the necessary discretion and confidentiality expected of such matters,” Krys says.


One of the main challenges for a fraud investigation and asset recovery firm is to find the right staff with the appropriate skill sets and personalities. It is about finding people who are energetic and ready to face challenges, Krys says.

“We have identified a dozen core capabilities that embody the values and strength of the firm and we strive to achieve and maintain these characteristics professionally and as an organisation. We recognise the importance of the corporate values on our culture and in attracting and retaining the best people.

The core capabilities form the guidelines for our team in delivering quality service and value to our clients and challenge each of us to achieve our professional and personal best.

Being a qualified accountant or lawyer is the basic expectation, he says, “but what we are looking for is how you get someone to think outside the box to provide that added value to clients.”

The demands of the profession are varied. Not only is it important to be sensitive to changes in circumstances, one needs to always be thinking of finding a solution when issues arise and not to get bogged down by the different demands of the parties involved.

A large part of the job is the ability to think ahead medium and long term despite all “the noise”, to set a goal and to get to that goal in the most efficient way possible, with a focus in maximising the return and distribution of assets, Krys says. “Staff loyalty and customer loyalty are our main priorities and we are privileged to have some of the best people and clients in the offshore world”.

KryS Global Executive Team 

Alison Cockle 
Chief Financial Officer

 Margot MacInnis
Managing Director
Cayman Islands
Timothy Le Cornu
Managing Director
John Greenwood 
Managing Director
British Virgin islands
Patrick McPhee
Managing Director
Edmund Rahming
Managing Director

KRyS in the Community  

 The management of KRyS Global believes the firm has a corporate and ethical social obligation to reach out to the communities in which it operates. Consistent with the vision of the CEO and founder, KRyS Global supports two broad areas of necessity, hardship or deprivation.

Those involve private events and programmes that focus on the development and safekeeping of children; and those that encourage healthy lifestyles and well-being.


Since its launch in 2007, KRyS Global has contributed in excess of $500,000 towards a variety of initiatives that reach these two objectives. Some of the charities or projects which the firm has supported in the past year or two include:

  • National Council of Voluntary Organizations
  • Junior Achievement
  • Facing Africa
  • Special Olympics
  • Cayman’s ARK – Acts of Random Kindness
  • Cayman Islands School of Fitness
  • Cayman Islands Red Cross
  • Cayman Islands Humane Society
  • Cayman Islands Crisis Centre
  • Cayman Islands Diabetes Trust
  • George Town Hospital Children’s Ward
  • Cayman Islands Stride Against Cancer
  • Cayman Islands Christmas for Kids Programme
  • Tristan Miller’s “Run Like Crazy”
  • BAAA High School National Championships
  • Bahamas Marathon
  • Bermuda Island Challenge
  • BVI Rugby Association
  • Caribbean Junior Squash Championships
  • Cayman Islands Rugby Union
  • Cayman Islands Triathlon
  • Cayman Islands Marathon
  • Pirates Week 10K Run
  • Jingle Bell Run
  • Virgin Islands Search and Rescue Swim the Sound
  • Sailability BVI

In addition, KRyS Global, in conjunction with its founder and CEO, is the lead organiser and sponsor of Off The Beaten Track – a one of a kind, 50km off-road ultra-marathon and relay race – which has raised over US$50,000 for the charity Facing Africa since the event’s inception in 2009.

This year, KRyS Global also commemorated its 5th year anniversary by donating a significant sum of money and employee time to four specific organisations carefully selected in each jurisdiction.

In the Cayman Islands, we refurbished the home of Ms. Blanche with assistance from Cayman’s ARK.

Bermuda staff teamed up with the Eliza DoLittle Society to cook and serve breakfast to the homeless and disadvantaged. In the Bahamas, we donned our aprons and joined the Great Commission in providing a hot meal to 270 people. And in the BVI employees assisted at the BVI Rugby Association Primary School Championships.



Kenneth M. Krys Founder & Chief Executive Officer