Hedge Fund Fraud

A hedge fund collapse is always a possibility due to the tenuous nature of the vehicle so investors must be especially vigilant of hedge fund fraud.

Depending upon its investment strategy, each hedge fund has its own unique investment risk. Investors should fully understand the risk in investing in hedge funds and should conduct appropriate due diligence prior to investing.

There are various methodologies for performing due diligence, but basic investigations should include:

In addition, hiring a professional due diligence firm to perform a more thorough background check is a wise decision to help safeguard from hedge fund fraud.

While the SEC can take action against fraudulent funds, investors must remain vigilant for signs of misrepresentations and outright fraud. Commonly, fund advisors misrepresent their professional experience and the fund’s investment track record. Increasingly, the misrepresentation of risks, investment strategies and the amount of leverage used in risky transactions has been seen.

Ponzi schemes have also been used to lure investors to hedge funds, often with devastating results. In this scenario early investors are paid interest, which gives the scheme the aura of legitimacy. According to the SEC, some funds have sent fraudulent account statements in order to keep investors in the dark regarding the funds status. Often, by the time the scheme is uncovered, the entire fund has been depleted.

The Securities Exchange Commission and the Commodity Futures Trading Commission have identified several indicators of hedge fund fraud:

Click here for an example of hedge fund fraud provided by the SEC.

If you have already invested in a hedge fund there are several steps you can take to monitor for hedge fund fraud:

If you do suspect hedge fund fraud, you should contact a securities attorney immediately to best protect your assets.

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