Hedge Funds Face Growing Concerns over Perceived Corruption

Following the financial crisis, the general public has become increasingly skeptical of the financial industry, questioning whether many firms, including hedge funds, are acting ethically. According to an article from Forbes, there may be merit behind that skepticism. Referring to a report published by New York law firm Labaton Sucharow, which specializes in class-action securities cases as well as whistle-blower actions, the article raises serious questions about the legality and ethics behind the actions of the industry.

The Hedge Fund Industry Questions Its Own Ethics

One of the surprising findings of the report is the lack of confidence the industry has in itself when it comes to playing by the rules and behaving ethically. Forty-six percent of respondents to the survey suggested that they believe their competitors break the law and act unethically. Even more shocking is that a full 30% of respondents indicated that they witnessed actual illegal or unethical wrongdoing themselves. But perhaps most disturbing of all, over one-third of hedge fund professionals reported that they believe they have to break the rules in order to get ahead.

Whistle-blower Protection Offers Hope for More Ethical Future

Recent changes in legislation, mostly through the Dodd-Frank financial reform law, offers protection and even incentives for whistle-blowers. This protection was added in the hope that it would help encourage more financial professionals to come forward with reports of wrongdoing. Under the act, whistle-blowers have their job protected, can remain anonymous and may even receive up to 30 percent of the monetary sanctions the SEC receives through any fines or penalties resulting from the subsequent investigation.

Despite these protections, however, nearly one third of respondents still believe they would face retaliation if they came forward with a report of illegal or unethical activities. Further, 28 percent suggested that their leaders would not come forward if a top performer had engaged in insider trading.

On the positive side, a full 87% of survey respondents indicated that they would in fact come forward and report nefarious activities if they felt they were adequately protected by whistle-blower legislation. However, since many professionals feel that the protection remains inadequate, industry regulators have significant work to do in selling their program. It’s imperative for the industry to ensure employees are protected from retaliation in order to regain public trust.

Future Employees May be Turned Off by Industry Ethics

With the lure of status and large paychecks, the hedge fund industry will always attract a certain number of high-achieving individuals. However, those of younger generations are increasingly asking about ethical standards and corporate responsibility when thinking about future career paths. If the hedge fund industry doesn’t take ethics seriously, highly talented professionals may seek out opportunities in the corporate world or other segments of the financial industry where ethical behavior is actively advocated. In the long-term, the very social license that the industry operates under may come into question if further significant scandals see the light of day. At the end of the day, adopting a culture of ethics is critical to the long-term success of the hedge fund industry.

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