4/01/2023
In 2008, Wall Street legend Bernard L. Madoff admitted to running a decades-long, multi-billion-dollar Ponzi scheme, resulting in billions of dollars in investor losses. Some of the most heavy-hit investors were those who invested in hedge fund portfolios. Funds made up of a portfolio of hedge funds have long been seen as relatively safe choices, so following the shock of the Madoff scandal, investors rushed to withdraw their investments. According to the industry tracker Hedge Fund Research, investment withdrawals in 2008 and 2009 totaled $158 billion. The rush of investors to withdraw their money from hedge funds only shows how investors have become too comfortable - relying on the advice of Wall Street brokers and executives without doing their research or due diligence. The exposure of Madoff's scheme has been, and should continue to be, a wake-up call to investors. Before investing in individual hedge funds or in pooled hedge funds, it is important to understand the risks associated with hedge fund investments. The most common investment vehicles involved in the Madoff scandal were funds of hedge funds. In 2004, these accounted for 54% of all hedge fund investments. Today they account for 40% of all hedge fund investments. These funds gather investors' money into a pool that typically includes 20 or more hedge funds - and each one invests through a variety of complex and risky financial instruments. By investing in a portfolio of hedge funds, rather than just one or two funds, the investor achieves broad diversification. While hedge funds are only lightly regulated and carry high inherent risks, funds of hedge funds are thought to offer security because professional managers are picking the hedge funds that make up the pools. Thousands of investors relied blindly on Bernie Madoff's representations that he was able to obtain significant positive returns year after year, despite the fluctuating economy and markets. As an investor, do not let promises of "almost a sure thing" overrule your common sense. Protect yourself - understand the risks and do your homework before investing in individual hedge funds or portfolios of hedge funds. Even though hedge funds and fund managers have made an effort to become more transparent following the Madoff scandal, there are still numerous risks associated with even legitimate hedge funds. These include: Because of these risks, you should not invest money in hedge funds that you cannot afford to lose. Despite the risks and costs associated with hedge funds, the potential for enormous returns can make hedge funds an attractive component of your investment portfolio. But before you invest, you should perform some due diligence. This includes: If you lost money in a hedge fund investment, you should seek the advice of an investment fraud lawyer who has experience and knowledge of securities arbitration and litigation. Most attorneys will provide a free consultation to help you determine whether you have a viable claim to recover your losses. If you are looking for an investment fraud attorney, contact DKRPA today for a FREE consultation to review your rights and options.Defining Hedge Funds and Funds of Hedge Funds
If It Sounds Too Good to Be True, It Probably Is
Understand the Risks of Hedge Funds
Do Your Homework Before You Invest
Are You a Victim of a Hedge Fund Scam?