Hedge funds have had a very good year so far--their best first-half year in a decade, according to Reuters . And while hedge fund managers argue that their hands are clean with regard to the financial crisis, there is plenty of reason to expect further regulation of these funds, in the US and in Europe . But Wharton Professor Gavin Cassar and University of Chicago Booth School of Business professor Joseph Gerakos examined the management of hedge funds, and came to the conclusion that investors do hold the power to demand "internal controls" to prevent fraud. And a couple of their findings may seem counterintuitive. Managers' fees, where the hedge fund is set up, and how old it is matters, but maybe not in the way you expect: Using a proprietary database of due diligence reports, we find that funds domiciled offshore are more likely to adopt stronger control mechanisms that decrease the likelihood of fraud and financial misstatements, and are more likely to use reputable outside service providers and incorporate stricter authority over the transfer of funds. We also find that internal controls vary systematically by fund leverage and fund age, and whether the fund pursues a short selling investment strategy; consistent with agency costs and the protection of proprietary information explanations, respectively. With respect to internal control outcomes, managers of funds that have restated performance receive lower management fees. Further, we find a positive association between internal controls and performance based fees, which is consistent with investors protecting against manipulated reported returns due to inadequate internal controls. Here's Cassar describing the authors' findings for Knowledge@Wharton : You can read Determinants of Hedge Fund Internal Controls and Fees here .