Hedge fund attorneys pick apart complex investment strategies to identify fraud. These strategies allow investors to pool their money by using multiple investment strategies that often take both long and short positions on certain stocks. (Long positions anticipate that a share will increase in value. Short positions bet that a stock will lose value.) By using more than one investment strategy, hedge funds can theoretically reduce the risk for their investors, while providing useful diversification. Successful hedge fund managers engineer their funds to outperform the stock market.

Excessive Trading Edit

Any securities attorney will tell you — hedge funds are generally only available to accredited investors for very good reason. The minimum investment for a hedge fund is often millions of dollars. An accredited investor usually has millions of dollars and makes over six figures per year. Hedge fund investments are highly illiquid, meaning that investors cannot withdraw funds whenever they want. Many hedge funds require that investors do not touch their investment for a year, and after that, they may only be able to withdraw money at specified intervals.

These types of funds rely on their manager’s market insights to generate a profit. Managers charge a 1 % to 2% fee of the assets they manage, referred to as “assets under management,” or AUM. If the hedge fund makes a profit, the manager charges another steep fee, often as much as 20%. And if the fund doesn’t perform well? The management fee still applies – one of the many reasons that hedge funds are only available to investors with deep pockets.

The Problem with Hedge Funds

As the number of hedge funds has grown, it has also become more difficult for hedge funds to make big returns. Veteran hedge fund managers point out that back in the 1990s, there were just 530 hedge funds. Today, there are over 8,200. With more competition, fewer hedge funds can make impressive returns. Making matters worse, one 2019 study found that hedge funds are increasingly using the same strategies. To produce healthy returns, hedge funds need to outsmart the market. When hedge funds follow the same strategy, they’re all competing for the already diminished pool of potential profits.

Hedge Funds Today

Profits generated by hedge funds are still on the decline. Investors have withdrawn money at record rates over the past decade. 2018 was a particularly bad year for hedge funds, and they lost 3.41% of their total assets

In spite of the dwindling returns, hedge funds remain a popular investment vehicle for institutional investors. And there are still opportunities for hedge funds to win big. As one article from The Wall Street Journal points out, their generally defensive investing strategy helped them outperform the market in 2020, after a decade of underperformance.

For instance, Glen Kacher, a hedge fund manager for Light Street Capital, heard about how quickly Covid-19 spread on cruise ships in early 2020. Taking a gamble that the worst would happen, he made investments in anticipation of a global pandemic. He pivoted the fund to invest in online retailers in March 2020, a decision that made his investors billions of dollars.

2020’s strange circumstances aside, the increasingly clogged market has forced hedge funds to consider means of making money outside of picking stocks. Hedge funds have increasingly invested in private companies, in the hopes that the companies will be successful and eventually go public. Some funds have also taken advantage of increasing volatility in the market – a risky tactic that wouldn’t suit most investors’ needs.

What Can Make Hedge Funds Risky Investments?

Hedge funds are more likely than other types of funds to invest in speculative securities, making them riskier. Hedge fund attorneys also warn: these types of investments are not subject to the same regulations as mutual funds. Additionally, hedge fund managers may not have to file reports with the SEC, depending on the value of the assets they manage. The less information the SEC has, the fewer protections it can offer investors.

What Would a Hedge Fund Attorney Do?

Because hedge funds rely on complex investment strategies, they pose a significant risk to the investor. The SEC (and any experienced hedge fund attorney) recommends that investors thoroughly review the prospectus before they invest.

There are a couple of questions investors should ask themselves and review with a hedge fund attorney:

  1. Do you understand how the fund intends to make money?
  2. Hedge fund managers charge steep fees. Are they worth the sometimes risky investments?
  3. Investors look to hedge funds for diversification. Could there be simpler, no-fee alternatives to grow your nest egg?

When Should I Speak with a Hedge Fund Attorney?

If you have any doubts about your hedge fund investment, you should reach out to a hedge fund attorney. The experienced securities attorneys at Fitapelli Kurta can assess your case for free and will represent you in an arbitration case if you decide to enter a dispute. To get started, call (877) 238-4175 or email info@fkesq.com.

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