SEC Targets Hedge Fund Industry

The SEC’s Office of Investor Education and Advocacy has issued an Investor Bulletin about hedge fund investing, warning investors to consider the additional risk of investing in hedge funds and highlighting recent enforcement cases. In an accompanying press release, the SEC reported that since the beginning of 2010, in has filed more than 100 cases “involving hedge fund malfeasance such as misusing investor assets, lying about investment strategy or performance, charging excessive fees, or hiding conflicts of interest.” Robert Khuzami, Director of the SEC’s Division of Enforcement, said “These hedge fund frauds have lured even the most sophisticated investors using the siren song of outsized returns or secured and guaranteed investments. As fraudsters increasingly capitalize on the cachet of hedge funds, we will maintain our strong presence in policing this industry.” The Investor Alert advises potential investors to conduct significant due diligence about a fund and its manager including: (a) reading the PPM and understanding the investment strategy and how it is executed; (b) evaluating conflicts of interest such as an adviser recommending its own hedge fund; (c) questioning performance claims; (d) understanding redemption rights; (e) researching the disciplinary history of a fund sponsor and the portfolio managers; (f) questioning fees and expenses; and (g) interviewing service providers.