Hedge funds beware

Our revamped website InvestRight.org has a new section on high-risk investments, which includes hedge funds. For good reason. Just say the words, hedge fund, and people’s eyes light up with visions of spectacular returns (never mind spectacular risks).

It is generally believed that hedge funds are for sophisticated, wealthy investors. The minimum investment for these funds used to be $1 million or more. Today, investors with as little as $100,000 participate in pooling programs, or even as low as $10,000 for funds that are structured more like mutual funds.

Remember hedge funds are not subject to specific regulation and are usually highly speculative in nature. Because investors tend to believe that hedge funds promise fabulous returns, they often don’t investigate before they invest. Just because a major accounting or law firm is involved in a hedge fund does not necessarily guarantee everything is on the up and up.

Now there is some evidence to suggest that hedge funds might be another vehicle for scam artists to exploit. A recent article in the National Post describes a hedge fund that is being investigated by the Ontario Securities Commission. The alleged fraud scheme is based on a Luxembourg-based (hint) water business that has the rights to tap glaciers in Iceland. More than 200 Canadians invested about $30 million in the fund.

The OSC alleges that investment funds units were sold at falsely inflated values, and the moneys generated by the funds were misappropriated. A prominent Toronto business executive was among the Canadian investors who invested in this hedge fund company.

Just alike any other investment, even if you consider yourself a sophisticated investor, do your research. Look at how the hedge fund is run, who is involved, and anything (like marketing glacier water) that might ring alarm bells.

How to Research Investments

Always evaluate and consider any investment opportunity with caution. The investment outcome may be different from your expectations.

  1. Understand Your Risk Tolerance

You should have an idea of your risk tolerance before making an investment. Risk tolerance is your willingness to accept a level of risk to achieve a return. Everyone’s risk tolerance is different, but there is a degree of risk in every investment.

  1. Gather Information

Before making a decision, get as much information as possible in writing. Ensure you understand how the investment works and the factors that could affect performance.

  1. Consult a Professional

An independent professional, like a lawyer or accountant, may be able to help you determine if the investment is right for you.

Report a Concern to the BC Securities Commission

If you come across an investment that seems too good to be true, report it to the BCSC. We welcome questions, comments, and tips from investors.

REPORT A CONCERN

If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Inquiries at 604-899-6854 or 1-800-373-6393 or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymous using BCSC’s online complaint form.

InvestRight.org is the BCSC’s investor education website. Subscribe to receive email updates from BCSC InvestRight.