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Investors Beware Of High Yield, High Risk Junk From The Mad Doctors Of Wall Street

August 19, 2013 Blog

The Mad Doctors of Wall Street are once again in their labs, conjuring up freaky new investment products to dump on unsuspecting retail clients.

Such products, commonly known as alternative investments, promise alluring yields. But they also carry hidden risks that – poof! – can result in the products to explode and burn the unsuspecting investor.

New banking regulations since the crash of 2008 have limited the amount banks are allowed to trade in-house. To make up those profits, the banks instead have turned their attention outside their trading rooms and into the living rooms of the unsuspecting retail investors.

This article from The Wall Street Journal sums up the Mad Doctors, uh, we mean Investment Bankers, chase for commission dollars.

“Individual investors are pouring tens of billions of dollars into a new generation of complex investment products, and regulators are raising concerns that not all buyers understand the costs and risks,” according to the Journal’s James Sterngold.

State and industry regulatory agencies already have certain Mad Doctors in their sites, according to the Journal. “Some state securities regulators are focusing their examinations of alternative-product brokers, while officials at Wall Street’s self-funded watchdog, the Financial Industry Regulatory Authority, say they are planning to file civil enforcement actions by year-end.”

Sterngold continues: “’With these things, it can be like giving a 6-year-old a circular saw,’ said Brad Bennett, Finra’s enforcement chief. Most mom-and-pop investors ‘don’t understand the risks they’re taking.’”

According to the Journal, securities regulators are watching an array of alternative investment strategies or products, including betting against stocks, called shorting, using derivatives or leverage to amplify and increase the size of the bet, and buying unusual assets such as privately issued junk bonds.

These strategies have largely been employed by wealthy investors and large institutions. Such large institutions seek to diversify the assets they hold, hoping to lesson risk over time.

But mom-and-pop investors are flesh and blood, and not institutions. If they lose retirement money after they’ve stopped working, it’s gone and impossible for most people to remake.

That hasn’t stopped the Mad Doctors from ratcheting up the risk. Indeed, almost $60 billion of investor cash poured into alternative mutual funds this year through July, making it by far the fastest-growing mutual fund category, the Journal reported. The number of such alternative mutual funds has exploded, from 77 in 2003 to currently more than 400.

And has demand from retail investors spurred this growth in alternative investments? Of course not. No investor asks his broker to invest in a highly leveraged, private debt fund that lends money to heavily indebted companies. Brokers sell such products, often at the behest of the Mad Scientists of the Street, who conjure up such ticking time bombs in their labs.

Investors, once again beware what appears magical from Wall Street. Some Mad Doctor has probably cooked up an alternative product that could transform into a living nightmare.

Zamansky & Associates are investment and stock fraud attorneys representing investors in federal and state litigation and arbitration against financial institutions.