The paper, From Manhattan to Madoff: the Causes and Lessons of Hedge Fund Operational Failure, is based on HedgeEvent, a web-based database of more than 300 operational events.

After theft and misappropriation, the next most common cause of operational failure is existence of assets, where the manager claimed to own fake securities or operated a Ponzi scheme where reported assets did not exist.

HedgeEvent contains 327 cases of hedge fund operational failure through 30 June 2009. Madoff, with an estimated financial impact of USD64bn, is by far the largest; the remaining cases have an aggregate estimated financial impact of approximately USD15bn. Of the 327 operational events, 121 have an estimated impact of USD10m or more, and 31 of at least USD100m.

Chris Addy, Castle Hall's chief executive, says: 'While operational failures are material - Madoff spectacularly so - it does not seem that fraud is pervasive in the hedge fund industry. Investors should, however, be very focused on the lessons which can be learned from those hedge funds which did generate large losses. Many of these were well established firms which attracted capital from reputable investors.'

The most common strategies subject to operational failure are long/short equity followed by managed futures. Investors have traditionally viewed these strategies, holding largely exchange-traded securities, as straightforward with low operational risk.