Due Diligence Key to Protecting Against Hedge Fund Fraud

With Madoff's scheme still heavy in mind and more examples of hedge fund fraud coming to light all the time, it is difficult to remember that legitimate hedge funds do exist. In fact, hedge funds can offer significant benefits to wealthy, sophisticated investors. However, due to the fact that hedge funds are private investment partnerships that are subject to minimal regulations and utilize complex investment strategies, they often carry a great deal of risk, including the risk of fraud. It is for this reason that conducting proper due diligence is absolutely necessary in order to protect oneself from fraud.

On its website, the FBI offers tips for investors on how to conduct a thorough investigation into the legitimacy of a hedge fund. Some examples of proper due diligence include:

• Reviewing www.SEC.gov for past regulatory actions against the fund manager;
• Locating and speaking with fund administrators and noting their independence;
• Being sure a reputable independent accounting firm performs an annual audit; and
• Hiring a non-affiliated due diligence firm to perform a more thorough background check.

Fraudulent activity may arise if and when hedge fund managers have conflicts of interest, fail to disclose important information, and/or solicit investments from unsophisticated investors who cannot understand the complex and intricate investment strategies inherent in the products.

Warning signs that a hedge fund may be a fraud include: lack of transparency, lack of trading independence, valuations issued by non-independent fund administrators, managers who trade in their own accounts, illiquid investments, and unusually strong performance claims. Additionally, according to the FBI, most legitimate hedge funds charge 1-2% of total assets managed and 20% of profits. Legitimate fund managers don't earn commissions on sales. If a hedge fund manager is being paid on commission, then that could be a red flag.

If you have suffered losses due to stockbroker misconduct or hedge fund fraud contact the law firm of Meyer Wilson. Our investment fraud attorneys have over 50 years of combined legal experience. For additional information contact us toll-free at 1.866.827.6537.