Be Sure to Dredge when you Invest in a Hedge

By: Kori Eskridge, Fall 2014 Intern

hedgeWhen you were little, it was easy for things like baseballs and toys to get lost in the hedges. Hedges are dense, shadowy and can make it hard to find missing items. Much like the hedges you might use for landscaping, hedge funds have some similar characteristics.  It can be easy for investor information to be hidden in the fine print or the flashy details of great past performance. So easy in fact, that SEC Compliance and Examinations Director Drew Bowden recently stated that in a two-year review, the SEC identified nearly 200 funds where potential investors were given only the most favorable description of past performance rather than full disclosure of winning and losing bets. According to a recent Bloomberg article, “the reviews have also found illegal collections of fees or severe compliance shortfalls in more than half of the private equity firms examined by the SEC since 2012.” Additionally, according to the same article, examiners have found “examples of hedge funds presenting modeled or back-tested performance as actual results and flipping between valuation methodologies.”

If you are considering investing in a hedge fund, do your due diligence. One of the best ways to get information is to ask questions and do some research:look

  • Read materials about the fund
  • Understand the fund’s investment strategy
  • Identify if the fund is using leverage or other speculative techniques
  • Understand how the fund’s assets are valuated
  • Understand how the fund’s performance is determined
  • Research the background of the hedge fund managers

A little due diligence and a lot of information gathering can help protect investors from losing money in the hedges.