A Florida judge's decision to freeze the assets of Lancer Management Group yesterday provides a refresher course for the fund industry to take as it looks for the next hot product. Unlike the registered mutual fund industry, the hedge fund industry has long suffered from blowups and scandal.

This time the scandal came to a head after the Securities and Exchange Commission charged that Lancer Management manager manipulated securities prices to overstate the fund's value. Judge William Zloch reacted to the allegations by issuing a temporary restraining order against Lancer Management Group, LLC and Lancer Management Group II, LLC and its manager Michael Lauer.

The New York Post first reported that something might be amiss at Lancer. Lancer Group responded to that article by filing a libel suit against the paper. Morgan Stanley has also sued the fund after over a bad investment, the University of Montreal's pension fund is suing to get back its investment and Lancer and Lancer has filed for Chapter 11 bankruptcy protection.

The details of the SEC allegations are not complex. Essentially, regulators claim Lauer started overstating the value of the hedge fund's portfolio (and its performance) in March of 2000. He then allegedly used the pumped up data to sell the fund to new investors and to keep existing investors corralled.

The case highlights the fundamental difference between registered, open-end mutual funds and hedge funds.

By redeeming shares on a daily basis, funds gain the trust of their investors.

By disclosing their portfolios funds are not able to perpetually overstate the value of investments.

By subjecting themselves to media and regulatory scrutiny they build trust.

These characteristics have been and are fundamental to the success of the fund industry. This value should not be forgotten in the rush to make the product du jour. Fund firms, especially those investing their brand and reputations in registered hedge fund products should take note.  

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