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How Not To Fall A Victim Of A Hedge Fund

How Not To Fall A Victim Of A Hedge Fund by Arkady Bukh, Esq

Over the past decade, the US Securities and Exchange Commission (SEC) has led the way in high-profile enforcement actions against Hedge Funds. The SEC point to fraud in the hedge fund universe as a reason for expecting hedge fund managers to register. Just like other things in life, that is good — and bad — news.

According to the SEC, the news is that in recent years a number of actions claiming hedge fund scams have been instigated. The great news is there is no proof showing that hedge funds engage in fraudulent activity out of proportion for the total invested.

In view of the attention-grabbing hedge fund frauds, it is vital for investors to know how to keep from being victimized by the relatively few instances of hedge fund fraud.

While the precise figure of hedge funds is hard to know because of an absence of centralized reporting requirements, it is obvious that hedge funds have developed, in number, exponentially, over the last decade.

Industry trade publications show that hedge funds have more than quadrupled in number from roughly 2,100 to over 9,000. Hedge funds currently account for up to 50% of everyday trading volume on the New York Stock Exchange.

How Investors Can Protect Themselves

Investors must conduct detailed due diligence before investing in any hedge fund. There aren't any one-size fits all approach, though. Due diligence has to be tailored to the particular hedge funds being considered.

Regulatory agencies have identified nine indicators of hedge funds fraud:

  • Lack of trading independence
  • Investor complaints
  • Audit issues
  • Litigation
  • Unusually strong performance claims
  • Illiquid investments
  • Valuation issues
  • Personal trading
  • ...