I have occasionally heard statements suggesting that hedge funds are designed to make money regardless of market conditions. It sounds great in theory, but the reality of the situation can be very different.
According to the Telegraph, hedge fund strategies lost almost 90 billion in August, their largest one month loss since October 2008. Overall, the industry has now lost $59.3 billion to date for the year. While these losses may be manageable for the collective 3 trillion industry as a whole, the effects have been brutal on a number of hedge funds with several hedge funds announcing plans to wind down as a result of heavy losses and requests by investors to withdraw their funds.
We have been following the markets closely for the past few months because of an increase in the number of articles that signal the potential for corporate wrongdoing in the industry. After reading Tuesday’s article in the Wall Street Journal about two hedge funds closing down, I had the distinct feeling that there would be an increase in hedge fund whistleblowers in the near future. While some funds seem to be doing the right thing and shutting down, it is possible that there will be others which will continue taking investments through misrepresentations in order to attempt to stay afloat.
The facts may ultimately reveal that even some of those that shut down were actually engaged in wrongdoing. A small fund that recently told its investors that it was shutting down in the wake of substantial losses during the market volatility of August had key departures in the preceding months which it did not tell shareholders. The individuals even remained on the company website.
This is the type of area that we except SEC regulators will be eager to examine. Earlier this year, Citigroup paid almost $180 million to settle allegations made by the SEC that the bank steered wealthy clients to two hedge funds during the financial crisis by claiming they were as safe as low-risk municipal bonds, even after they knew that internal ratings showed problems and one fund was seeking an emergency loan.