NEW YORK (HedgeWorld.com)–At least one lawyer with experience in the industry predicts that new regulatory and enforcement initiatives are coming, whether at the level of the states or from federal agencies.

This year’s plethora of hedge fund fraud cases add up to a total of around US$1 billion in money, meaning $1 out of every $1,000 in hedge fund assets was subject to fraud in the past 12 months, said Richard Marshall of Kirkpatrick & Lockhart Nicholson Graham LLP.

Speaking at a conference organized by the New York State Society of Certified Public Accountants and its foundation, Mr. Marshall presented the matter with dramatic flair. “A Colombia drug cartel keeps your money more secure,” he claimed.

He described many types of violations by hedge funds, ranging from outright theft of client assets to over-valuation of the portfolio to trading on insider information and engaging in forbidden practices in short selling.

With hedge funds struggling with poor returns due to market conditions and the large amount of capital that is now in the funds, certain managers are chasing performance through illegal means like insider trading, he said.

Mr. Marshall alluded to a review of hedge funds by the attorney general of Connecticut as an example of governments’ increased attention to the industry.

He predicted also that in its inspections, the Securities and Exchange Commission will focus on issues that so far have not been subject to legal reprisal, such as survival bias due to managers closing down unsuccessful funds and starting new ones.

A manager’s track record from the most recent enterprise may be technically correct but still misleading because it omits the prior history–a person or team that has been lucky in recent years may look terrible in the full record.

Mr. Marshall thinks the SEC will be troubled by performance information that does not incorporate all information about the manager’s past. Survival bias in data bases has been the subject of many studies, but regulatory action would be new.

CKurdas@HedgeWorld.com