The term “hedge fund” refers to a cooperation between private investors. Because hedge funds are often only accepted by investors with substantial personal wealth, there are few laws in place to safeguard them. The larger profits offered by hedge funds are often accompanied by a greater financial commitment and less control. Hedge funds are based on the premise that high-net-worth individuals are more financially knowledgeable and do not need the same level of safeguards as average investors.
A recent surge in popularity has led many investors to participate in hedge funds, which aren’t all dangerous. Many investors, particularly older citizens, don’t know what they’re investing in when they put some of their money in a hedge fund. Or, the hedge fund is utterly unsuited for their financial circumstances and investment objectives.
Hedge funds primarily attract investors due to their managers’ reputations and the exclusive nature of their investing ideas. Investors participate in hedge funds in the belief that the manager’s investing wizardry would result in market-beating returns. As with an elite club, a hedge fund’s investment attraction is mainly based on:
- The fund’s exclusivity for those who fulfill particular financial or other requirements;
- And the difficulties external observers have in seeing what happens within (in terms of investment strategies).
Initially, hedge funds-maintained exclusivity by demanding enormous minimum investment amounts that were only accessible to the world’s richest individuals. While limits on who may participate in hedge funds remain prevalent today, certain investment vehicles labeled “hedge funds” have investment criteria that make them accessible to a far larger segment of the investing public. As the number of hedge funds multiplied and the investor base expanded, profit margins for funds contracted and competition intensified, providing an incentive for fund managers to commit misconduct in order to continue in business.
How Pervasive Is Hedge Fund Fraud?
Hedge fund advocates often tempt prospective investors with unrealistic promises of rapid, substantial profits. Regrettably, the absence of control around these funds often permits marketers to make promises that exceed the real profits they can produce.
Not all hedge funds are financial frauds; in reality, the vast majority of hedge funds are completely legal investment vehicles for certain skilled and risk-averse clients. Unfortunately, because to a lack of regulatory monitoring, the high-risk investments that are often involved, and the safety of the hedge fund manager’s income, investors may be exposed.
Hedge funds are not obliged to register with the Securities and Exchange Commission. As such, they are exempt from the statutory reporting requirements applicable to other investment funds. This lack of control, along with the substantial initial commitment necessary to join in a hedge fund, creates an environment in which fund managers may easily take advantage of investors.
Hedge fund fraud might take the shape of deceptive comments that encourage investors to feel the hedge fund is fit for their requirements, inaccurate information regarding the hedge fund’s performance, or it could even be the cover for a more traditional investment fraud.
Securities Litigation: Hedge Fund Liability Theories
While hedge fund managers are often excluded from SEC requirements, they may still be held legally accountable for carelessness or fraud. Indeed, there are several grounds under which an investor who has been harmed may seek to hold their hedge fund management financially accountable for their losses.
Notably, hedge fund managers owe investors a fiduciary obligation. This is the highest level of care required under law. It requires hedge fund managers to act in good faith with their investors.
Additionally, an investor may seek other specific causes of action against a hedge fund and its management.
Among them are the following:
Negligence; negligent misrepresentation; violation of contract; unjust enrichment; promissory estoppel; civil conspiracy; and helping or abetting a fraudulent scheme.
As numerous high-profile hedge fund fraud cases have shown, these types of schemes may take many shapes. In other cases, naïve investors have been burned because hedge fund managers failed to sufficiently disclose the nature and risks associated with the underlying assets.
In other cases, fund managers have misled investors about the hedge fund’s performance, fraudulently claiming success while hiding large losses.
Additionally, there are situations in which a hedge fund is an outright financial scam, intended to hide a Ponzi scheme or similar kind of apparent theft or willful deceit.
Hedge Fund Investors Require Competent Legal Representation
Always expect hedge funds and their management to employ legal counsel. They will seek to evade blame by using one of many legal defenses and blaming your losses on another factor, often “market risk.”
If you feel you have been a victim of hedge fund management negligence, suspected hedge fund fraud, or a hedge fund scam, you must get immediate legal guidance from an experienced investment fraud attorney. Your attorney will be able to evaluate the facts of your case and aid you in pursuing legal action if required. You should not be required to compensate for fraud.
When Should I Seek The Advice Of A Hedge Fund Fraud Attorney?
Before investing a single dollar in a hedge fund, all investors should consult an attorney with expertise litigating hedge fund fraud cases. Your best shot for recognizing some of the warning signals of fraud is to see an attorney who has advised victims of hedge fund fraud.
If you have already invested in a hedge fund, however, contact a hedge fund fraud attorney immediately if you suspect anything is wrong. A law firm with experience researching and fighting hedge fund fraud cases may utilize its resources and legal expertise to ascertain if your concerns about a hedge fund’s activities are justified. You can rely on the Frankowski firm’s devoted specialists to advise you on the best course of action to take to preserve your rights and/or investment.
