GLOBAL - A company has launched what it claims is the first certification system, in the wake of the Madoff scandal, to demonstrate there is a low fraud risk attached to hedge funds and other investment managers.

The Protean Fraud Appraisal Certification (PFAC) is said to take the underwriting usually applied to insurance risk appraisals and apply some of it to the analysis of investment managers, to determine just how high or low the prospect of fraud might be.

The company behind the venture, Protean Investment Risks, is known at present for delivering insurance products which should protect investors from hedge fund fraud, but is now taking its work one to step further for fund managers to deliver a service combining the "disciplines of insurance risk underwriting with traditional due diligence techniques" and which works with the firm's own "historic fraud loss analysis tool".

Nathan Sewell, partner at Protean Fraud Risk Appraisal, said it has seen "strong interest" in the certification regime and was confident that it would provide comfort to investors wishing to invest in hedge funds while requiring "minimal time investment".

"The priority at this time for managers and investors alike is confidence. PFAC enables hedge fund and other managers globally to provide evidence that they are a low fraud risk bringing increased confidence to both new and existing investors," said Sewell.

PFAC argued the system would support the hedge fund industry's self-regulating drive towards better standards and practice because while there has been increased due diligence of fund managers in recent months, there has do far been little focus on the prospect of fraud risk.

In order to fulfil the certification, PFAC will conduct on-site checks and background checks on companies through specialist providers and has its own "highly experienced crime insurance expert" to act as underwriter.

Several European pension funds were directly and indirectly hit last year by the discovery of a Ponzi scheme at the firm of hedge fund manager Bernie Madoff.

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