Identifying hedge fund elements susceptible to economic crime M Bosua orcid.org/0000-0002-2647-834X Dissertation accepted in fulfilment of the requirements for the degree Master of Commerce in Forensic Accountancy at the North-West University Supervisor: Mr AP van Zyl Co-Supervisor: Mr A Groenewald Graduation: May 2020 Student number: 24194018 i PREFACE I dedicate this study to every individual that supported me during this research journey. Thank you for every suggestion, cup of coffee, word of encouragement and sacrifice that brought me to this point. I would like to extend special and heartfelt thank you to the following persons: ● My parents, Herman and Heleen, for your continuous support in everything I do; ● My sister, for providing distractions when needed; ● Karien, for guiding me through life during my first year of this study; ● Danielle and Stephan, for guiding me through life for the remainder of this study; ● Bruce Springsteen, for great writing music; ● Cornelia van Biljon; for her editing; ● My supervisors André Groenewald and Albert van Zyl, for every review note, email and phone call. This has been a part of the great unknown, where my feet failed but to the King of all Kings be the glory and praise for everything that I have and am, is sewn together with His Grace. May the Lord’s favour be on the NWU and on our beloved country and its people. O re tshegofatse, Morena Seën ons, Heer Bless us, oh Lord ii ABSTRACT Hedge funds have provided an alternative approach to investing and is said to have revolutionised the way people invest and manage their wealth (Frush, 2007:7). Yet, despite all its popularity and notoriety, few people understand what hedge funds are, how they work and how they are regulated, and this leaves many people with feelings of admiration and fascination, but also envy and fear (Desmet, 2008:1). The global hedge fund industry has historically been known for its lack of transparency and Pierre-Louis (2009:23) emphasises that the elusiveness of hedge funds and their investment strategies is a cause of concern for the investing public, as well as the financial securities market. After the Global Financial Crisis of 2008, the financial services market came under scrutiny and the global hedge fund industry began to reconsider its regulatory environment. Various countries have since implemented more rigorous regulations on hedge funds which indicates that more oversight was needed in the industry. The objective of this study is to determine what elements of hedge funds are susceptible to economic crime through the conceptualisation and clarification of: i. The term “hedge fund fraud”; ii. The unique elements of hedge funds; iii. The analysis of identified case studies of hedge fund fraud in the United Kingdom (UK) and South Africa; and iv. The identified elements of hedge funds susceptible to economic crime through the analysis of the identified case studies. Key terms: hedge fund/s, economic crime, fraud, United Kingdom, South Africa, susceptibility. iii OPSOMMING Verskansingsfondse bied 'n alternatiewe benadering tot finansiële beleggings en het gelei na 'n verandering in die manier waarop mense hul welvaart belê en bestuur (Frush, 2007:7). Ten spyte van al die gewildheid en berugtheid van verskansingsfondse, is daar min mense wat verstaan wat verskansingsfondse is, hoe dit werk en hoe dit gereguleer word. Hierdie misterieuse aard van verskansingsfondse laat mense verwonderd, gefassineerd, maar moontlik ook angstig (Desmet, 2008:1). Die internasionale verskansingsfonds-bedryf is histories bekend vir sy gebrek aan deursigtigheid, en Pierre-Louis (2009:23) benadruk dat die ontwykende aard van verskansingsfondse en hul belegging strategieë 'n bron van kommer is vir die beleggingspubliek en die finansiële- en sekuriteitsmarkte. Na die Wêreldwye Finansiële Krisis van 2008, was die finansiële dienste-mark onder ‘n vergrootglas geplaas en het die internasionale verskansingsfonds-bedryf begin om sy regulatoriese omgewing te heroorweeg. Sedertien het verskeie lande strenger maatstawwe oor verskansingsfondse geïmplementeer. Hierdie verskyning kan daarop dui dat oorsig in die bedryf nodig was. Hierdie studie is daarop gemik om te bepaal watter elemente van verskansingsfondse vatbaar is vir ekonomiese misdaad deur die konseptualisering en verklaring van: i. Die term “verskansingsfondsbedrog”; ii. Die unieke elemente van verskansingsfondse; iii. Die ontleding van geïdentifiseerde gevallestudies van verskansingsfondsbedrog in die Verenigde Koninkryk (VK) en Suid-Afrika; en iv. Die geïdentifiseerde elemente van verskansingsfondse wat vatbaar is vir ekonomiese misdaad deur die ontleding van die geïdentifiseerde gevallestudies. Sleutelterme: verskansingsfonds/e, ekonomiese misdaad, bedrog, Verenigde Koninkryk, Suid- Afrika, vatbaarheid. iv LIST OF ABBREVIATIONS ACFE - Association of Certified Fraud Examiners AIF - Alternative Investment Funds AIFMD - Alternative Investment Fund Managers Directive CEO - Chief Executive Officer DDCM - Dynamic Decisions Capital Management EU - European Union FCA - Financial Conduct Authority FRA - Forward Rate Agreement FSA - Financial Services Authority FSB - Financial Services Board FSCA - Financial Services Conduct Authority IAS - International Audit Standard IRS - Interest Rate Swap ISA - International Standards on Auditing MWL - Mat Worldwide Limited NAV - Net Asset Value OTC - Over the Counter RVAF - Relative Value Arbitrage Fund SEC - U.S. Securities and Exchange Commission UK - United Kingdom USA - United States of America WCF - Weavering Capital Fund WCM - Weavering Capital Limited WCUK - Weavering Capital (UK) Limited v TABLE OF CONTENTS PREFACE ................................................................................................................................. II ABSTRACT ............................................................................................................................. III OPSOMMING .......................................................................................................................... IV LIST OF ABBREVIATIONS ...................................................................................................... V CHAPTER 1 .............................................................................................................................. 1 PURPOSE AND SCOPE OF STUDY ........................................................................................ 1 1.1 Introduction and background .......................................................................... 1 1.2 Problem statement ........................................................................................... 4 1.3 Research aim and objectives ........................................................................... 5 To address the problem statement, the following general and specific research objectives will be addressed through theoretical and conceptual studies of literature. ......... 5 1.3.1 Research aim ..................................................................................................... 5 1.3.2 Research objectives ........................................................................................... 5 1.4 Research design and research methodology ................................................. 5 1.4.1 Research design ................................................................................................. 6 1.4.2 Research methodology ....................................................................................... 6 1.5 Literature review ............................................................................................... 7 1.6 Selection of cases ............................................................................................ 9 1.7 Chapter outline ............................................................................................... 10 CHAPTER 2 ............................................................................................................................ 12 UNDERSTANDING THE TERM HEDGE FUND FRAUD ........................................................ 12 2.1 Understanding the term fraud as a specific crime and as a collective noun ................................................................................................................ 12 2.1.1 UK Fraud Act 2006 ........................................................................................... 12 2.1.2 South African common law ............................................................................... 13 2.1.3 US wire fraud and securities fraud .................................................................... 14 2.1.4 Using the term fraud as a collective noun for economic crime and other related business irregularities ........................................................................... 16 2.1.5 International Audit Standard 240 ...................................................................... 16 2.1.6 PricewaterhouseCoopers ................................................................................. 16 2.1.7 Association of Certified Fraud Examiners ......................................................... 17 2.1.8 Conclusion ........................................................................................................ 17 2.2 Hedge funds .................................................................................................... 18 2.2.1 Defining the term “hedge fund” ........................................................................