If you turn on any of the most popular investment news channels, you have no doubt heard plenty about hedge funds. Over the last decade, hedge funds have become very popular in the industry. In spite of the fact that several hedge funds have been involved in high-profile investment fraud scandals, including Bernie Madoff’s $50 billion Ponzi scheme, hedge funds continue to become even more popular.
At Sonn Law Group, our investment fraud lawyers are committed to protecting the rights and interests of investors nationwide. We have extensive experience handling hedge fund fraud claims.
In this guide, we provide a brief overview of the most important things that investors need to know about hedge funds and hedge fund fraud. If you believe that you have been the victim of hedge fund fraud, please contact our law firm for immediate legal assistance.
What is a Hedge Fund?
A hedge fund is simply an industry specific term that describes a popular type of ‘investment partnership’. Through this type of complex investment vehicle, general partners (the fund managers) team up with limited partners (the investors).
The limited partners put in the money, and the general partner skillfully manages that money in a way that is consistent with the fund’s overall objectives. At least, that is what is supposed to happen. In reality, hedge fund managers do not always deliver on their promises.
What Does a Hedge Fund Invest In?
Hedge funds invest in a wide variety of different assets. Beyond traditional stocks and bonds, hedge funds can also invest in real estate, currencies, complex derivatives, and much more. Under U.S. securities regulations, hedge funds have far more leeway to invest in risky assets than do funds that are open to retail investors.
Further, hedge funds can use a variety of different investment strategies. Many use large amounts of leverage in a manner that is not possible for mutual funds. While this can certainly offer some major benefits to the fund’s investors, it can also be a curse.
Hedge funds are incredibly complicated and they can take on an enormous amount of risk. Sometimes, it can be difficult for investors to know what exactly their money is invested in at any given money.
Why is Hedge Fund Fraud So Common?
Unfortunately, hedge funds can be a conduit for fraud schemes. Hedge funds are only open to so-called ‘accredited investors’. To be eligible to invest in a hedge fund, an investor must meet certain minimum standards. Most notably, they must have a sufficient net worth.
Under current law, an investor’s net worth must be in excess of $1 million, excluding the value of their primary residence. Otherwise, an investor is generally not eligible to put money into a hedge fund. As the Securities and Exchange Commission (SEC) deems accredited investors capable of assessing and taking on immense risk, hedge funds are very lightly regulated.
Of course, not all hedge funds are scams; indeed, many are legitimate investment vehicles that are run by highly competent fund managers. Still, with hedge funds, there is a very real lack of regulatory oversight.
By its very nature, that fact makes hedge funds inherently risky. Far fewer protections are offered by regulatory officials. As such, investors who wish to put their money into a hedge fund need to do their due diligence to ensure that their money is properly protected.
Securities Litigation: Theories of Hedge Fund Liability
Though hedge fund managers are exempt from many standard SEC regulations, they can still be held legally liable for negligence or fraud. In fact, there are many different theories by which a wronged investor may be able to hold their hedge fund manager financially liable for their losses.
Notably, hedge fund managers owe a fiduciary duty to their investors. This is the highest standard of care under U.S. law. It requires hedge fund managers to deal with their investors in good faith. Further, there are other specific causes of action that an investor can bring against their hedge fund and hedge fund manager. These include:
- Negligent misrepresentation;
- Breach of contract;
- Unjust enrichment;
- Promissory estoppel;
- Civil conspiracy; and
- Aiding or abetting a fraud scheme.
As many of the most prominent cases of hedge fund fraud have shown, these types of frauds can take many different forms. In some cases, innocent investors have been burned because hedge fund managers failed to properly disclose the nature and risks of the underlying investments.
In other cases, fund managers have misled investors about the performance of the hedge fund, falsely claiming that the fund has been doing fine and covering up major losses.
Further, there are also cases in which the hedge fund is an outright investment scam, designed as a cover for a Ponzi scheme or another type of blatant theft or intentional misrepresentation.
Hedge Fund Investors Need Competent Legal Representation
You can be sure that hedge funds and their managers will always obtain legal counsel. They will try to rely on one of many different legal defenses to try to deny liability, and instead blame your losses on another factor, usually “market risk”.
If you were the victim of hedge fund manager negligence or possible hedge fund fraud, it is imperative that you seek immediate advice from a qualified investment fraud attorney. Your attorney will be able to review the specific circumstances of your case and help you take the appropriate legal action. You should not be made to pay for fraud.
Were You the Victim of Hedge Fund Fraud?
We can help. At Sonn Law Group, our top-rated investment fraud lawyers have the skills and experience needed to handle complex hedge fund fraud claims. We are proud to help victims fight for full and fair compensation for their investment losses.
If you were a victim of hedge fund fraud, please do not hesitate to contact our law firm today for a free, fully confidential evaluation of your claim.