The SEC has a new "most-wanted" list:  100 or so hedge funds, whose performances seem too good to be true.  The charted list of names and numbers has been worked over by SEC staffers, covered with scribbled handwritten notes and emphasized with yellow highlights. SEC officials won't say exactly how they compile the list or how much it cost to build the computer-powered system that identifies funds with "aberrational performances."  But the Agency proudly announces that 4 civil-fraud lawsuits have been filed based on the system's output. The so-called "aberrational performance initiative," which began in 2009, uses system programs that crunch through and analyze monthly returns from thousands of hedge funds, spitting out potential frauds.

• One hedge fund sued by the SEC that reported annual returns in excess of 25%, allegedly achieved its results by overvaluing its assets, including Nigerian warrants.
• A hedge fund of funds generate seemingly great returns allegedly by overriding internal controls on vetting outside funds, causing it to sink investor money into frauds.
• Whether an identified fund is trouncing the overall market, or is churning out consistently modest results without suffering a down month (a la Bernie Madoff), or take a stumble here and there, they all manage to outperform their rival funds - year after year after year.

"There is serious fraud in this space, and we have been attacking it," said Bruce Karpati, co-chief of the SEC's asset-management enforcement unit.  The hedge-fund chart dominates a corner of his lower Manhattan office. After the agency failed to detect the $17.3 billion Ponzi scheme by Bernie Madoff, who wowed investors with steady returns over several decades, SEC officials decided they needed a way to trawl through performance data and look for red flags that might signal a possible fraud. The system is designed partly to detect returns that barely budge when markets are volatile. That might have set off alarms inside the SEC about Madoff. ThinkStrategy Capital Management LLP. When SEC staffers are asked to 'think' of one particular case that came out of this initiative, they're likely to mention the civil-fraud complaint filed against ThinkStrategy Capital Management LLP.  The fund drew the SEC's attention in part because it's performance seemed to defy stock-market gravity. SEC enforcement chief Robert Khuzami rattled some people this year when he suggested that any fund with returns that steadily topped market indexes by 3% could catch the agency's eye. The SEC now says it doesn't set such thresholds. Robert Kaplan, the other co-chief of the SEC's asset-management enforcement unit, said it isn't so simple. After the SEC's machine spits out the name of a specific hedge fund, the SEC's 65-person asset-management enforcement unit starts looking for an explanation for the numbers. Encouraged by the results so far, SEC officials are widening the computer-powered scrutiny to mutual funds and private-equity funds. That means data on more than 20,000 funds are being fed into the SEC's computers or soon will be. The enforcement-by-the-numbers machine isn't popular on Wall Street, where some investment managers are worried they might get snagged in an investigation simply because their numbers look too good.  [wsjournal, 12/27/11]