Bloomberg ran article today about investors and institutions who have hired private eyes to investigate hedge funds before investing.
For example, "A probe three years ago by his First Advantage Investigative Services LLC found in public documents that a brokerage run by the pair had agreed to settle regulators’ claims that it improperly used customer assets as loan collateral and had been fined at least 11 times for violating rules at several U.S. exchanges."
The story quotes anectdotal evidence from firms and individuals who luckily avoided troubled funds because of their investigative work.
It will be interesting to see whether hedge funds actually end up getting more scrutiny from the private sector than from regulators. Given the pitiful investigative work by the SEC, the private sector probably has a better chance at regulating funds in the future, particularly given investors' recent skepticism.