The investment arbitration lawyers at Zamansky LLC have considerable experience representing the legal interests of hedge fund investors. Our firm was the first to file an arbitration claim against Bear Stearns following the collapse of its High-Grade Structured Credit Strategies Enhanced Leverage Fund and its counterpart, the High-Grade Structured Credit Strategies Fund. More recently, our securities fraud attorneys have been representing investors in the Harbinger, Millennium and Corporate Special Opportunities (CSO) hedge funds in federal class actions.
Although hedge funds are complex investment tools, the trillion dollar industry itself remains lightly regulated, rendering investors vulnerable to fund managers that neglect their fiduciary responsibilities. In many cases of investor loss, the fund management team’s improprieties are to blame.
Our securities fraud law firm works with institutional investors (such as “fund-of-funds” products) as well as individual high net worth investors. We have the depth of resources and the richness of experience to effectively represent investors with very large claims and those with more modest ones.
Investment and Hedge Fund Fraud Attorneys Clarify Concentration
“Concentration” refers to the amount of any single investment or asset class held by a hedge fund. Concentrating a fund’s assets into a single position or small number of positions can increase performance volatility, with rapid swings up and down. If the strategy of heavily concentrating fund assets is not properly disclosed to investors, the fund can be liable for investor losses.
The hedge fund and securities fraud attorneys at Zamansky LLC have the knowledge and experience necessary to successfully handle concentration cases. We are committed to helping investors across the United States and abroad recover financial losses resulting from the actions of their financial advisors, brokers and brokerage firms. Contact our securities fraud law firm today to learn more about how we can help you with your case.
Understanding Leverage Cases
“Leverage” is another word for borrowing. Hedge funds frequently use leverage in an attempt to boost their returns. While leveraging may improve returns, borrowing to finance a fund’s investments increases volatility and can accelerate and increase losses. Leverage problems and resulting liability generally occur in two situations. First, when a fund does not properly disclose that it will use leverage as a part of its investment strategy, the fund can be liable for investor losses. Second, a fund can also be held responsible for losses when the fund violates internal limits on the use of leverage.
If you believe that you may have sustained financial losses as a result of leveraging actions, contact our hedge fund and securities fraud law firm today.
Hedge Fund Fraud Attorneys Explain Strategy Deviations or “Style Drift”
Sometimes a hedge fund portfolio manager will decide to change the investment strategy of the fund after he has gathered investor assets. Depending upon the offering documents, so long as the manager is transparent about this shift and gives investors a chance to redeem at a fair price before making the change, a change in strategy is permissible. However, if the manager makes a fundamental change, for example from one asset class to another, without disclosing the change at the proper time, this is known as “style drift”. When “style drift” takes place, the portfolio manager can be liable for any resulting investor losses
If you believe you may have suffered a loss as a result of a portfolio manager’s strategy deviation, or “style drift,” contact our law firm today. We offer free, initial consultations with experienced hedge fund and securities fraud attorneys.
Hedge Fund Fraud & Mismanagement
Hedge funds are high-risk investment vehicles, and their failure may be more likely than with other investment vehicles. There are numerous ways that these funds become distressed, including cash flow problems following a period of poor returns, excessive leverage, and a lender making a margin call that compels the fund to liquefy assets at a steep discount.
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 and “style drift” 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 leverage 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.
Tips for Hedge Fund Investors from Your Investment Arbitration Lawyers
Although hedge funds are not required to register with the SEC, they remain subject to the same prohibitions against investment fraud as other market participants, and managers have the same fiduciary duties as other investment advisers. Unfortunately, more than a few fund managers have been enticed by the lack of mandated reporting to take advantage of those who entrust them with their investment assets.
As with any investment opportunity, investors should fully understand the myriad risks associated with hedge funds before making an initial investment. Conducting appropriate due diligence is critical. Such fundamental research should include:
- Reviewing www.sec.gov for past regulatory actions against the fund manager;
- Reviewing state securities agencies’ web sites for complaints;
- Reviewing federal district, bankruptcy and appeals court records through www.uscourts.gov/courtlinks
- Locating and speaking with fund administrators and noting their independence;
- Ensuring that a reputable independent accounting firm performs an annual audit.
Considering the sizable investment one must make to participate in most hedge funds, hiring a professional due diligence firm to perform a more thorough background check is a smart investment itself to further safeguard against potential fraud victimization.
While the SEC can take action against fraudulent funds, investors must also remain vigilant for signs of misrepresentations and outright fraud. Some common areas of concern are misrepresentations about the advisors’ professional experience and the fund’s investment record. Our securities fraud law firm has also seen an increase in the number of hedge fund fraud cases where the types of risks, investment strategies, and the amount of leverage itself has been improperly conveyed.
Our FINRA arbitration attorneys note that Ponzi schemes have also been used to lure investors to hedge funds, often with devastating results. While early investors are paid interest to give an air of legitimacy and avoid arousing suspicion, later investors are not so fortunate. With some of these more nefarious hedge funds even distributing fraudulent account statements to keep investors in the dark regarding their fund’s true status, the money is often long gone by the time the scheme is uncovered.
The SEC and the Commodity Futures Trading Commission have identified several indicators of hedge fund fraud:
- Lack of trading independence – hedge fund managers trading through affiliated broker\dealers;
- Investor complaints – investors being unable to redeem their investments in a timely fashion;
- Audit issues – lack of audits by reputable independent accounting firms
- Litigation – civil suits and securities arbitration cases against hedge funds filed by investors alleging fraud; Unusually strong performance claims – hedge fund performance claims are better than market average over a long period of time;
- Illiquid investments – investing in a commodity which is not easy to value (incentive to overvalue investment in order to earn a larger commission);
- Valuation issues – use of related parties to value illiquid investments or use of a non-independent fund administrator;
- Personal trading – hedge fund managers trading in their own accounts;
- Aggressive Bear Shorting – hedge funds take a short position in a stock (betting it will go down) and orchestrate efforts to disseminate unfounded or materially false negative information about the stock, eroding the price and allowing the perpetrators to profit on the short position.
The SEC has implemented new rules to prevent naked short selling of financial services companies’ stocks
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:
- Thoroughly read and understand the fund’s prospectus and memorandums;
- Be an active investor – engage fund managers by asking questions and taking notes;
- Save all documentation;
- Consult an attorney before signing any investment commitment;
- Take special care about navigating redemption and litigation rights;
- Do not rely on a set static checklist – different funds can employ radically varying investment strategies, and must be judged individually;
- Look closely at the fund’s transparency, third-party pricing, quality and control of its investment professionals, and internal processes.
What to Do if you Suspect Fraud
Investors suspecting hedge fund fraud are strongly encouraged to contact a securities attorney to best protect their rights and their assets. The investment arbitration lawyers at Zamansky LLC have the resources, expertise, and experience to represent clients with significant and moderately sized claims.