Hedge Funds Playing With Valuation?

New research shows that many hedge funds may be "cherry-picking" certain securities in their client portfolios and valuing them at overly favorable prices to improve the performance of their funds. This is especially significant given the number of hedge funds in the marketplace and volatility in the market as of late. Investment managers are blowing up as of late. For example, Ellington Capital suspended withdrawals at the end of September on two of their funds due to the credit market crunch. Two funds at Bear Stearns Asset Management had to suspend activities in late July due to large losses on CDOs. This has caused a domino effect on the market (especially on structured finance products) as the assets from these funds are liquidated in open market auctions. Because of the mark-to-market accounting principle of trading securities, banks and brokers had to mark down their securities to the auction levels...causing huge losses in the broader market. However, hedge funds do not operate under the same scrutiny. Many are offshore entities and not registered with the SEC. However, the idea of hedge funds playing with valuation may be of no surprise. According to a couple academic researchers, "distorting returns is more feasible when the opportunity for exerting managerial discretion is higher". Yea. Duh.
-JK