Are You Familiar With Hedge Fund Fraud? Here Is What You Need to Know

Knowing how to spot the signs of hedge fund fraud can help you protect your investments and take the appropriate steps. Here’s what you need to know.

What Is Hedge Fund Fraud?

The hedge fund has gained popularity over the years, and so most people are turning to it believing that hedge funds are a secure way to earn higher returns. Contrary to this, hedge funds can be risky at times and may lead to hedge fund fraud.

Hedge funds are investment structures where investors pool their assets to attract several investors based on the reputation of their managers and the secret of their investment strategies.

Hedge fund fraud is a crime associated with the use of investment capital to defraud investors. It involves any act of financial misconduct or investment fraud committed for or by the account of a hedge fund which may include:

  • Embezzlement of funds belonging to clients
  • False promises regarding high returns
  • Operating Ponzi schemes
  • Hiding investment losses
  • Advanced fee schemes

In other cases, hedge fund managers may be accused of insider trading when making investment decisions to benefit themselves and their clients. Hedge fund frauds may be challenging to identify since they are not subject to mutual funds’ exact disclosure requirements and other available investment products.

Why Are Hedge Fund Frauds Common?


Hedge fund fraud typically feels like putting your hard-earned money in a black box and relying on someone’s promise that your cash is safe there. Then when the money disappears, hedge fund investors struggle to find out what happened.

In most hedge fund frauds, investors’ cash disappears not because of the legitimate investment decision but because of other fraudulent conduct by the management or employees.

Hedge fund fraud is pretty common because hedge fund promoters entice potential investors by giving them optimistic claims of sizable, fast returns. So, the lack of oversight associated with the hedge funds often allows hedge fund promoters to make claims over and above the returns they can deliver.

How to Tell if a Hedge Fund Is Engaged in Fraud

Thankfully, hedge fund fraud is relatively easy to spot if you know what to look for—especially with the help of a Florida securities lawyer. The following are a few ways to look out for a hedge fund fraud scheme.


Artificially Smooth Returns

When hedge fund managers purposely smooth returns by reporting moving averages, the reports will, in turn, show a positive serial correlation and a low level of volatility. In a real sense, moving averages show a lower vitality than raw observations. It will still possess serial correlation even when the raw observations have nothing.


Losses Reported Differently Than Gains

When it comes to any particular variable, the serial correlation is conditional. The hedge fund manager may desire to smooth losses by delaying the reports of the poor performance. At the same point, they may be reporting gains when they appear with the hope of retaining the hedge fund investor.


A Low Correlation With Other Assets

Researchers came up with a set of investments that correlates hedge fund returns. It was developed purposely to mimic well-known hedge fund trading strategies. A low correlation could be due to the hedge funds making good returns and delivering what it was expected to. But if there is no correlation, the hedge fund’s returns are likely distorted.

Examples of Noteworthy Hedge Fund Fraud Cases

Looking at previous hedge fund fraud cases can help you understand how this type of investment securities fraud works. Here are a few notable cases.


Madoff Investment Case

This is one of the most notorious cases for the hedge fund as Bernie Madoff was running a Ponzi scheme with Bernard Madoff Investment securities. He was a well-respected professional, even though some questioned his legitimacy. It is estimated that the hedge fund fraud was around $65 billion. Madoff pleaded guilty and was sentenced to 150 years in prison.


SAC Capital Case

It was run by Steven Cohen and was among the leading hedge funds with around $50 billion assets under management. Over the years, the Securities and Exchange Commission (SEC) has been investigating the hedge fund as several traders were charged with insider trading. Eight former employees at SAC were convicted.


The Galleon Group

The Galleon was a large hedge fund management group with over $47 billion before closing down around 2009. The group was founded by Raj Rajaratnam, who was later arrested with five others. He was found guilty on 14 criminal charges and was sentenced to 11 years in prison.

Understanding the Laws for Hedge Fund Fraud

As opposed to mutual funds, hedge funds are not subjected to many regulations designed to protect investors and investment funds. Based on the assets in the hedge funds advised by the hedge fund manager, some hedge fund managers may not need to register or file any reports with the SEC.

However, hedge fund investments are subject to prohibitions against fraud, just like the other market participants and their hedge fund managers who owe fiduciary duties to the funds they manage.

As the law states, hedge fund investors do not receive federal and state protection, which commonly applies to most mutual funds.

Are Hedge Funds Legitimate?


Not all hedge funds engage in unethical or illegal behaviors. Most hedge funds are well-run by hedge fund managers. Even though hedge funds are well-capitalized, they operate ethically and with fewer investment strategies. For sophisticated investors, hedge funds can be legally marketed to them. So, hedge funds are not illegal.

Can You Sue a Hedge Fund?

Yes. You can sue a hedge fund, but you need to read the contract you signed with them. In some cases, you may need to sue the investment manager and the hedge fund.

With their high investment strategies, hedge funds are not subject to many regulations designed to protect investors and their investment funds. Therefore, investors in hedge funds need to understand the laws governing them before choosing this type of investment security.

Contact Our Law Firm if Hedge Fund Managers Have Defrauded You

A good hedge fund fraud lawyer is experienced in identifying hedge fund fraud and taking legal action against those who commit it. At Clark Law Group, our attorneys are committed to protecting investors against the misconduct of financial advisers, hedge fund managers, and financial institutions.

Our business attorney offers a free case evaluation and provides our clients with trusted legal advice and advocacy on matters regarding hedge fund fraud. We place immense value on the attorney-client relationship we build when guiding our valued clients through the process of combatting hedge fund fraud schemes.

Suppose an investment firm, investment bank, or financial institution has taken advantage of your or a loved one’s investment due to the lack of proper disclosures. In that case, you may recover investment loss damages. Get that free consultation today with Clark Law Group and begin moving forward.

We look forward to assisting you.