Hedge Fund Fraud | Hedge Fund Definition | Offshore Hedge Funds | Funds of Hedge Funds

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Hedge Fund Fraud
Hedge funds can also be offshore.

Hedge Fund Fraud High in U.S.

Compared to Europe, it is much easier for people to start a hedge fund in the U.S. This is one of the reasons hedge fund fraud takes place in the U.S. but is almost non-existent in Europe.

Hedge Fund Definition

A hedge fund generally refers to a relatively unregulated investment fund, often a partnership rather than a corporation in form, and characterized by unconventional strategies (i.e., strategies other than investing long only in bonds, equities or money markets).

Like mutual funds, hedge funds pool investors' money and invest those funds in financial instruments in an effort to make a positive return. Many hedge funds seek to profit in all kinds of markets by pursuing leveraging and other speculative investment practices that may increase the risk of investment loss.

Unlike mutual funds, however, hedge funds are not required to register with the SEC. This means that hedge funds are subject to very few regulatory controls. Because of this lack of regulatory oversight, hedge funds historically have generally been available solely to accredited investors and large institutions. Most hedge funds also have voluntarily restricted investment to wealthy investors through high investment minimums (e.g., $1 million).


 What are "funds of hedge funds?"

A fund of hedge funds is an investment company that invests in hedge funds -- rather than investing in individual securities. Some funds of hedge funds register their securities with the SEC. These funds of hedge funds must provide investors with a prospectus and must file certain reports quarterly with the SEC.
 

Hedge Fund Fraud Prevention

What protections do I have if I purchase a hedge fund?
Hedge fund investors do not receive all of the federal and state law protections that commonly apply to most registered investments. For example, you won't get the same level of disclosures from a hedge fund that you'll get from registered investments. Without the disclosures that the securities laws require for most registered investments, it can be quite difficult to verify representations you may receive from a hedge fund. You should also be aware that, while the SEC may conduct examinations of any hedge fund manager that is registered as an investment adviser under the Investment Advisers Act, the SEC and other securities regulators generally have limited ability to check routinely on hedge fund activities.

The SEC can take action against a hedge fund that defrauds investors, and we have brought a number of fraud cases involving hedge funds. Commonly in these cases, hedge fund advisers misrepresented their experience and the fund's track record. Other cases were classic "Ponzi schemes," where early investors were paid off to make the scheme look legitimate. In some of the cases we have brought, the hedge funds sent phony account statements to investors to camouflage the fact that their money had been stolen. That's why it is extremely important to thoroughly check out every aspect of any hedge fund you might consider as an investment.
What should I do if I have a complaint about a hedge fund or a fund of hedge funds?

If you encounter a problem with your hedge fund or fund of hedge funds, you can send the SEC your complaint using our online complaint form at www.sec.gov/complaint.shtml.

To avoid hedge fund fraud - check out every aspect of the hedge fund you plan to invest in.

Sources: Wikipedia and SEC

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