Steve Mnuchin is expected to be the new Secretary of the Treasury Department for the U.S. Mr. Mnuchin is a former hedge fund manager, which got us to thinking about the complexity of these investments and the potential pitfalls investing in hedge funds.

The first thing to know about hedge funds is that they are private investments. This means they are exempt from registration with the Securities and Exchange Commission. They are defined as “alternative investments using pooled funds that may use a number of different strategies in order to earn active return… for investors.”

The second thing to know is that they are legitimate investment products; when properly managed, they may offer a substantial return for their investors. Because investors can choose to purchase any kind of products – real estate, currencies, derivatives, etc. – there are ample opportunities to make a significant amount of money.

The issue with hedge funds, however, is that they are often not managed properly. In fact, there is so little oversight in some cases that managers may promise unrealistic gains for their clients. Because hedge fund managers are often paid a percentage of the return, managers may be willing to take unnecessary risks; after all, it costs them nothing if the investment products fail, but they stand to make considerable sums if the investments succeed.

Do you have a claim?

Private investments should be recommended only to accredited and experienced investors with a high-risk tolerance who can withstand substantial losses. You may be able to bring a claim for unsuitability if your manager fails to explain just what kinds of risks you face – a common complaint when it comes to hedge funds – or recommends these kinds of high-risk, private investments when they work against your goals.

Investors may also be able to pursue a claim for breach of fiduciary duty for the same reason – that the hedge fund manager did not consider the best interest of the client when he or she recommended the product. If the manager purposely lied about the risks you face or failed to do the proper due diligence into the products and you have sustained financial losses as a result, you may be able to make a claim for damages.

The Frankowski Firm represents victims of stockbroker fraud throughout the country. If your hedge fund manager was negligent with your investments, failed to uphold his or her fiduciary duty, or performed in a fraudulent way, we can represent your interests. To learn more about our services, please call 888.741.7503 or fill out this contact form.