While frauds are not frequent within the hedge fund industry, they occur enough that it causes investors to consider it seriously.

A new insurance product on Monday begins offering hedge fund investors cover for fraud losses. Integro, a New York insurance broker, and Amber Partners, a risk rating agency for the industry, aim to capitalise on the fear of fraud, when investing in hedge funds.

A similar product, launched in January by London start-up Protean, already covers $10bn of assets and Protean says it expects another $20bn-$30bn of business in the very near future.

Integro covers only funds that have assets frozen by regulators, while Protean pay-outs can be triggered by other regulatory or legal action or referred to independent arbitration.

Both companies require investors to insure their entire portfolio, preventing them from insuring just the riskiest funds.

The cost to investors varies, with Protean charging 0.05-0.15 per cent of the value of the portfolio and Integro saying the cost should be less than 0.2 per cent, depending on the type of funds covered.