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.