Hedge funds are private investment pools for financially sophisticated investors with a lot of money and a high tolerance for risk. Because they’re private funds, they aren’t registered with the Securities and Exchange Commission (SEC), and they don’t have to disclose basic information about their investments. But today, we also have investment companies that invest in hedge funds rather than in individual securities. These “funds of hedge funds” allow individual investors with less capital to participate in hedge funds. Some, but not all, of these funds of funds are SEC registered, but they embody nearly all the risk of the private hedge funds from which they are composed.
Problems with Hedge Funds
While the fund of funds may be subject to federal registration and disclosure requirements, the underlying hedge funds aren’t Thus, the investor and even the fund of funds manager will find it difficult to assess the true performance of the underlying funds. Hedge fund managers have lied about their backgrounds and qualifications, misrepresented the performance histories of their funds, and covered up their theft of investors’ money through false reporting and Ponzi schemes. Ownership units in funds of funds or in hedge funds themselves may not be liquid. You may not be able to access your money if you need it or just want to get out.
Participation in a fund of hedge funds is extremely expensive. Investors must pay two layers of fees: the fees of the fund of hedge funds and the fees charged by the underlying hedge funds.
Overpriced, Underperforming, and Unfit for Most Investors
Unfortunately, some stockbrokers and investment firms market hedge funds as a reasonable option for average investors. Hedge funds are, by their very nature, unsuitable for many investors. Investors can lose all of their money in these volatile funds. In addition, the high fees and expenses can offset any profits the fund makes.
If you’ve lost a significant amount of money in a hedge fund investment, you may be the victim of stockbroker misconduct. Contact our attorneys today for a free consultation of your legal rights. You may have actions to obtain your lost investments.