how to tell if hedge fund is committing fraudIt is the Securities and Exchange Commission’s new “most-wanted” list: a chart covered with handwritten notes, yellow highlighter and the names of about 100 hedge funds.

The hedge funds have one thing in common: Their performance seems too good to be true, with some trouncing the overall market and others churning out modest results without ever suffering a down month. Some funds on the list stumble but still always outperform rival hedge funds.

“There is serious fraud in this space, and we have been attacking it,” said Bruce Karpati, co-chief of the SEC’s asset-management enforcement unit. The hedge-fund chart dominates a corner of his lower Manhattan office.

The list is the low-tech product of a high-tech effort by the SEC to crack down on fraud at hedge funds and other investment firms. After the agency failed to detect the $17.3 billion Ponzi scheme by Bernard L. Madoff, who wowed investors with steady returns over several decades, SEC officials decided they needed a way to trawl through performance data and look for red flags that might signal a possible fraud.

In 2009, the SEC began developing a computer-powered system that now analyzes monthly returns from thousands of hedge funds. Officials won’t say exactly how it works or how much it cost to build, but the agency has announced four civil-fraud lawsuits filed as a result of what it calls the “aberrational performance initiative.”

One hedge fund sued by the SEC reported annual returns of more than 25% by allegedly overvaluing its assets, including Nigerian warrants. A hedge fund of funds achieved its seemingly great returns by allegedly overriding internal controls on vetting outside funds, causing it to sink investor money into frauds.

Encouraged by the results so far, SEC officials are widening the computer-powered scrutiny to mutual funds and private-equity funds. That means data on more than 20,000 funds are being fed into the SEC’s computers or soon will be.

The enforcement-by-the-numbers machine isn’t popular on Wall Street, where some investment managers are worried they might get snagged in an investigation simply because their numbers look too good.

SEC enforcement chief Robert Khuzami rattled some people this year when he suggested that any fund with returns that steadily topped market indexes by 3% could catch the agency’s eye. The SEC now says it doesn’t set such thresholds.