One year earlier, Bishop (later joined by five current and former NFL players) had invested $20 million in several hedge funds managed by International Management Associates (IMA) of Atlanta. Before writing his checks, however, Bishop attempted to vet the fund’s managers. He visited IMA’s offices to meet the principals, and he and some of his fellow investors asked the NFL Players Association’s Registered Financial Advisor Program, a service that scrutinizes money managers, to run a background check. Its review gave the firm a clean bill of health.

Today, Bishop believes the NFL program’s incompetence cost him and his colleagues their capital. In June, they filed suit against the NFL and its players union. According to court documents, the plaintiffs claim the Players Association failed to unearth state and federal tax liens totaling $1.04 million against fund principals Kirk S. Wright and Nelson Keith Bond. (Bond has not been charged with any wrongdoing.) Bishop and his fellow investors also argue that the advisor program failed to discover that Wright had inadequate professional liability insurance.

TOP VIEW Most hedge funds are run conscientiously, but the ones that implode because of incompetence or outright fraud hog the headlines. Reacting to recent high-profile fund collapses, investors and wealth managers are turning to specialized agencies to perform background checks on prospective fund managers. By combing through public records and interviewing colleagues and acquaintances, investigators can ascertain if these individuals are above board. Careful review of their operations also highlights those at risk of loss from problems with logistics.

By the time Bishop and his colleagues invested, IMA was close to insolvency, according to SEC charges filed this past February. The SEC alleged that IMA had “largely dissipated” the $115 million to $185 million in capital it had raised from about 500 investors since 1997. The SEC also claimed that IMA fraudulently raised money by misrepresenting the assets in, and rates of return of, its funds.

“It’s shocking,” Bishop says, referring to the failure of the Players Association background check to unearth IMA’s problems. “We just feel like we were let down. If we had known about their background, nobody would have invested.” (The NFL denies the players’ allegations. “There were no requests for background checks,” says Richard Berthelsen, general counsel for the NFL Players Association.)

While fund manager fraud like that alleged in the IMA case often seems to be constant fodder for the business press, it actually accounts for only a microscopic percentage of hedge fund failures. Aside from IMA, two cases in the past year have captured the most attention. KL Group in Miami lost $213 million and Bayou Management in Greenwich, Conn., lost $450 million. But according to Hedge Fund Research, a Chicago consulting firm, 848 funds shut their doors in 2005 (a year that saw more than 2,000 new launches)—representing a record 11.4 percent attrition rate. All but a few funds closed because they did not meet their investment objectives—not because their managers were crooks.

Despite this, a growing number of private investors, spooked by high-profile meltdowns, are seeking to avoid being caught up in the next debacle by hiring investigative firms and making increasingly pointed inquiries of fund managers themselves. This may be prudent, in part because the government’s oversight regime is in flux. (One month after Wright’s arrest in May, a federal appeals court overturned an SEC rule that required most hedge funds to submit themselves to regulatory scrutiny.) Many fund managers argue the rule was the wrong solution—an expensive and time-consuming attempt to head off fraud, when the overwhelming danger to investors is really incompetence among managers. In any case, as the number of hedge funds nears 9,000 and assets under management top $1.2 trillion, these vehicles remain largely unregulated, so careful due diligence is crucial to minimize the risk of serious loss.