A google search just won’t cut it.

Randy Shain, executive vice president of First Advantage Investigative Services in New York, has to use a lot more online and manual search methods when he investigates hedge funds for his funds of hedge funds clients. Funds of funds managers want to know if there are any skeletons in their closets, such as criminal charges and lawsuits, before they trust hedge fund managers with their money.

Shain begins his investigations with a public records search to verify the fund manager’s credentials—his work history, where he went to school and making sure that the information on his CV is accurate. “I want to make sure what they say on their CVs is true and find any gaps in work history,” says Shain.

He gets regulatory records from the Securities & Exchange Commission and other regulatory agencies to see if there have been any complaints filed against the manager.
Shain also uses for pay news services like Lexis-Nexis, Factiva, Westlaw and Dialog to track down information.

He does a complete search of all court records, from civil, criminal, bankruptcy and estate courts. This requires much more digging than just finding online records which Shain says only “give rudimentary information.”

He does a manual search of court records, retrieving documents that get to the heart of what the case is. “We look through the whole complaint,” he says. “It will say what the charges and all the allegations are against the fund, not just the basic information,” he says.

Shain also conducts interviews with people identified in the public records as business and professional contacts of the manager he’s investigating.

What’s the most satisfying part of the job? “I feel most pride when I discover a gap in someone’s employment exists and I can find out what they did during the gap,” says Shain.

The reasons aren’t always terrible, such as someone having been in jail, Shain explains.
“Sometimes it’s just a woman who had a baby and took a couple of years off from the workforce.”

Shain complains that in today’s resumes, people will often say they worked at a job from, say, 2002-2004, without putting down the month they started and left. “It can make for unaccounted for time,” he explains. A person might really have held a job from December 2002 through January 2004, which leaves a lot of time unaccounted for.
“When they say 2002 to 2004 it’s an easy way to make it seem like a career has not been interrupted and sometimes that’s not true,” he says.

He admits that he’s a bit jaded now, saying “I’ve seen just about everything.” Only one recent discovery really surprised him. Shain was investigating a person who said he was a full-time hedge fund manager seeking capital from a fund of funds. Shain was interviewing someone he thought was a former colleague of the person, who said “what do you mean by former, he’s still here.” and made the discovery that the manager really held down a full time job and was not running the hedge fund full time. “He said he intended to run the fund full time when he got the money,” says Shain.. Needless to say, he didn’t get any from Shain’s client.

There have been some strange things going on in Iceland’s financial markets, according to a recent story from the FT. In January, a group of international hedge fund managers organized by none other than Bear Stearns (before it’s calamitous fall) gathered at the 101 Hotel in Reykjavik for drinks and dinner at which they discussed the strange events. The dinner itself became a legend among Iceland’s financial community.

As an executive who works at one of Iceland’s big banks, told the story, “Upon entering the bar I was approached by one of the hedge fund managers. He informed me that all the people at this party—except for him, of course—were shorting Iceland.” The executive says that the fund manager told him that the potential for profits in Iceland was like “the second coming of Christ.”

“As dinner progressed—some people actually decided not to eat at all but just sit at the bar—and more drinks were downed, the conversation and questions started to get more hostile and short positions openly declared,” says the executive.

The goal of the hedge fund managers was to put pressure on Iceland’s credit default swap market.

The information learned at that alcohol-fueled dinner has now become part of a full scale investigation by Iceland’s Financial Supervisory Authority into an alleged speculative attack by hedge funds on Iceland’s currency, banking system and stock market. Jonas Jonsonn, director general of Iceland’s FSA, says the authorities are “searching whether some parties have systematically been distributing negative and false rumors about the Icelandic banks and financial system in order to profit from it.”

Other reports say that Iceland’s krona has fallen 21% against the euro this year on speculation Icelandic banks may not be able to sustain debt-financed growth, forcing a government bailout. .Kaupthing Bank hf and Glitnir Bank hf, Iceland’s No.1 one and No.3 banks, have Europe’s highest credit default swap spreads, indicating investors think they could go bankrupt.

Why are hedge funds going after Iceland? Because it’s cold? Or maybe because they think that they can get away with it. Only time will tell.

Two committees made up of private sector asset managers and investors that were established by the President’s Working Group released sets of voluntary best practices for hedge fund investors and asset managers last week

The key word here is “voluntary,” The PWG has no intention at this time of making any of the proposals mandatory. That has some hedge fund watchdogs very upset.

The best practices for asset managers call on hedge funds to adopt comprehensive best practices in all aspects of their business, including disclosure, valuation of assets, risk management, business operations, compliance and conflicts of interest. Eric Mindich, CEO of Eton Park Capital Management, chairs the Asset Managers’ Committee.

For investors, the best practices offered include a Fiduciary’s Guide and an Investor’s Guide. The Fiduciary’s Guide provides recommendations to individuals charged with evaluating the appropriateness of hedge funds as a component of an investment portfolio. The Investor’s Guide provides recommendations to those charged with executing and administering a hedge fund program once a hedge fund has been added to the investment portfolio. Russell Read, chief investment officer of the California Public Employees’ Retirement System, the largest pension fund in the US, heads the Investors’ Committee.

After the proposals were announced with great fanfare by Treasury Secretary Henry Paulson, Richard Blumenthal, attorney general of Connecticut, where many hedge funds are based, said “non-binding best practices or voluntary guidelines are an imaginary fence—and virtual farce: They stop nothing.”

Blumenthal says that “The Treasury Department is suggesting faux regulation, creating a dangerous illusion of over sight and engendering a false sense of security. Federal officials are proposing a speed limit, but making compliance voluntary: Some will fail to comply, imperiling all. Instead of voluntary guidelines, the federal government should set specific, common sense rules and provide for federal and state enforcement.”

He points out that “I proposed such measures—to be mandatory—more than a year ago. The subprime meltdown has vividly demonstrated the dangers of deregulation.

“Hedge funds have become too big and too important to remain outside the rules. Suggesting hedge funds do the right thing is not enough. Through risk disclosure and risk control, we must ensure reasonable, rational regulation,” Blumenthal declares.

Bradley Ziff, head of the hedge funds advisory practice at consultant Oliver Wyman, thinks the proposals are excellent and consistent with proposals that were released in February by the Hedge Funds Standards Board in the UK to improve hedge fund oversight.

Ziff, a special advisor to the HFSB and its liason to the PWG, told HFR “this (the PWG’s recommendations) is a significant enhancement in looking at the approaches to risk management, transparency, disclosure and leverage in the hedge fund industry.” Moreover, “there is a symmetry and commonality in the way both groups have examined risk for hedge funds,” said Ziff. “They made significant steps forward. The next step is working toward a harmonization of the two documents.

There have always been people who have prospered from others’ financial misfortunes; what is one person's financial problem, seems to be a great deal to someone else ready to pounce on it.

That’s exactly what’s happening in the debt markets now. Many major financial institutions had to write off billions of dollars in debt that had nosedived in value over the last few months. Some hedge funds have collapsed because of it.

Well, the buyers, known as “vultures” in the industry, have already started to pounce. The Cayman Islands Monetary Authority had a huge increase in the number of hedge funds registering in January 2008. Yolanda McCoy, head of the investments and securities division of CIMA, noted that many of the new funds were the so-called “vulture” funds, which were formed to pick over and buy up the remnants of the distressed debt that has overwhelmed the financial markets.

As one lawyer noted, “the vulture funds serve the same purpose as sharks do in the ocean. They are coming in to clean up the mess from all the bad debt, in the same way sharks eat fish in the ocean. It’s actually a service.”

Knighthead Domestic and Knighthead Offshore, are the US and Cayman Islands-domiciled distressed credit and event driven funds set to be launched on May 1 by Knighthead Capital, New York.

The funds will buy distressed corporate debt and seek to have a voice in the business changes made by companies in financial distress. Tom Wagner, a principal of the firm, says “we think it’s a fantastic opportunity to launch now,” and points to the huge amount of debt the fund will have to choose from. He expects the funds will have a combined $700m to $1bn in assets soon.

Dalton Investments, Los Angeles, which profited big time from the Asian debt crisis ten years ago, is also ready to launch a distressed debt fund which will invest in distressed mortgage-backed securities. Steven Persky, founder and CEO, says there are literally “hundreds of thousands” of mortgage loans that are now sitting in distressed mortgage backed securities. He expects the fund will soon have “hundreds of millions” of dollars to invest.

According to Persky, while the pickings are huge, to get the best will require some serious research, which his firm will do, hiring Todd Sherer, of Countrywide Financial to head their research team. Could there be anyone better than a former Countrywide trader to pick over all those bad mortgages?

Two more distressed debt funds are scheduled to launch in June. Colchis Capital plans to launch the Distresssed Bank Debt Fund, to invest in distressed senior bank debt, and Distressed RMBS Fund, to invest in distressed mortgage backed securities. Dan Nero, CFO of Colchis, declined to comment on the funds.