What Are Signs of Hedge Fund Fraud? How Can I Protect Myself?
| November 18, 2019
We at Meyer Wilson encourage you to come in and speak with our attorneys if you suspect you’ve sustained investment losses due to hedge fund fraud. Hedge fund fraud cases can be particularly complicated, and you will probably find it helpful to discuss the details of your situation with an experienced professional who can offer specific guidance and protect your interests.
That being said, there may be many signs that a hedge fund is an investment scam:
- Prior investor complaints or litigation history
- A concentration in illiquid or difficult-to-value investments
- Pressure to invest or assurances that the hedge fund is “completely safe”
- A lack of regular audits by an independent accounting firm
- Unusually good performance long term, especially in a poor market
- Lack of transparency or lack of trading independence
- Managers who trade in their own accounts
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.
Due Diligence Key to Protecting Against Hedge Fund Fraud
With 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.
Stockbroker fraud related to hedge funds can cause serious losses for vulnerable investors—and recovering those losses can be difficult. If you have lost money investing in a hedge fund and suspect fraud, please reach out to an experienced investment fraud attorney today to learn more.