Zamansky LLC is a leading specialist when it comes to representing the interests of investors in hedge funds. The trillion dollar hedge fund industry is lightly regulated and in many cases investor’s losses are due to hedge fund fraud on behalf of a fund’s management.
We represent both institutional investors such as “fund-of-funds” and high net worth investors who have trusted their investments with hedge fund managers. Our firm was the first to file an arbitration claim against Bear Stearns due to the collapse of its funds: the High-Grade Structured Credit Strategies Enhanced Leverage Fund and its counterpart, the High-Grade Structured Credit Strategies Fund.
We are able to draw on our broad resources as well as our nearly 30 years of experience allowing our attorneys to represent very large claims as well as smaller claims from high net worth individuals. We passionately believe that wealthy individuals and families as well as institutions do not forgo their rights when they invest in hedge funds.
Hedge Fund Investment Techniques
Hedge funds pool investors’ money and, by using complex financial instruments, aim to achieve higher rates of return than traditional investments such as mutual funds. Historically, hedge funds tried to hedge against the risk associated with a bear market by entering into a short position. Although hedging is the practice of attempting to minimize risk, today, hedge fund managers largely make speculative investments, thereby exposing themselves to more investment risk than the overall market.
Hedge fund Strategies include:
- Investing in equities, bonds (including mortgage backed securities), options, futures, commodities and illiquid investments;
- Hedging by buying a security to offset a potential loss on an investment;
- Investing in distressed or bankrupt companies;
- Concentrating positions in securities of a single issuer or market;
- Investing in derivatives, such as options and futures contracts;
- Short selling (sale of a security you do not own);
- Investing in volatile international markets;
- Arbitrage (simultaneous buying and selling of a security in different markets to profit from the difference between the prices);
- Investing in privately issued securities.
Hedge funds aren’t limited to any particular financial market and often leverage assets (borrowing money for investment purposes) to maximize profits, with the potential for returns to be significantly higher. This technique greatly increases risk and is the reason many funds are collapsing.
Hedge funds are lightly regulated and currently managers are not required to register with the Securities and Exchange Commission (SEC). Hedge funds are allowed to operate behind closed doors because they are considered private offerings under the Securities Act of 1933. Additionally, these funds aren’t required to submit periodic reports.
Historically, hedge funds have only permitted high net worth and institutional investors to contribute money. Funds of hedge funds have changed this dynamic by allowing significantly lower minimum investments, sometimes as low as a $25,000. Funds of hedge funds are an investment company that invests in multiple hedge funds, balancing out risk and rewards among them.
Hedge Fund Performance, Fees and Other Facts
- Hedge fund managers are compensated on a contingency-based fee structure, which generally is a one or two percent management fee plus an incentive fee (around 20 percent) of annual profits.
- Hedge funds have exploded over the last ten years. According to the FBI website, “hedge funds have quadrupled in number (from approximately 2,100 in 1996 to approximately 8,800 in 2006), and have over $1.3 trillion under management.”
- Hedge funds account for 20 to 50 percent of the daily trading volume on the New York Stock Exchange.
- At least 83 U.S. hedge funds shut down in 2006 amounting to $35 billion in assets.
- Investors are required to have $1 million in net worth or an annual income of $200,000.
- An SEC proposal would also require at least $2.5 million in investments, excluding personal residences, for an individual to invest in a hedge fund.
- More than 100 fraud cases have been brought by the Securities and Exchange Commission since 2001.
Hedge Fund Market Collapses
Due to leveraged assets and volatile strategies failure may be more likely than with other investment vehicles. Problems can arise when a hedge fund experiences cash flow problems following a period of poor returns on investment. Excessive leverage can precipitate sudden capital depletion when investing in volatile financial instruments or commodities. Furthermore it is possible that a hedge fund can be forced to liquefy assets at a steep discount if a lender makes a margin call.
Some high profile hedge funds recently collapsed including:
- Amaranth Advisors LLC – $9 billion fund that lost $6 billion in one week and was accused of market manipulation soon afterwards.
- Bear Stearns – The High-Grade Structured Credit Strategies Fund and High-Grade Structured Credit Strategies
- Enhanced Leverage Fund lost $1.6 billion when the subprime mortgage market collapsed.
- Dillon Read Capital Management – The UBS backed hedge fund accumulated losses of $124 million in a single quarter forcing its closure.
- Sowood Capital – $3 billion fund run by a former Harvard-educated money manager used leveraged to invest an estimated $12 to $15 billion. The fund lost more than half its value in the credit market and was forced to sell its remaining portfolio.
Of greater concern to investors is failure resulting from hedge fund fraud. Despite no requirement to register with the SEC, hedge funds are still subject to the same prohibitions against fraud as other market participants, and managers have the same fiduciary duties as other investment advisers.