What is a hedge fund scam? Unfortunately, due to the opaque nature of many investment hedge funds, understanding hedge funds can be tricky, and it’s all too easy for someone to get scammed. It may be difficult to determine whether a hedge fund is actually a scam, or simply a high-risk investment proposition. If you’re worried about hedge fund scams, consider these points:

Understanding Hedge Funds Can Be Nearly Impossible

Because they’re unregulated, understanding hedge funds is difficult at best; downright impossible at worst. Hedge fund managers aren’t required to give regular reports to investors, and investors may not know hedge fund investment strategies. Hedge funds sometimes charge exorbitant fees, so you don’t see a return on investment even when the hedge fund performs well.

If you’re considering investment hedge funds, look for a hedge fund that is as forthcoming as possible. Look for hedge funds that voluntarily offer plenty of information to investors on investment strategy, prior returns, fees and regular performance reporting. Anything less could be a poorly managed hedge fund, or an outright hedge fund scam.

Hedge Fund Scams Hide Behind Opaque Investment Strategies

Because hedge funds aren’t required to report regularly on returns or value statements, you have virtually no way of knowing whether a hedge fund is a legitimate investment venture or a scam. You could invest a million dollars, only to have $50,000 go toward an investment while the rest goes toward fees or is squandered by the hedge fund manager.

The past few years have seen more than a few hedge fund scammers turn up: These people took investors’ money and spent it maintaining a lavish lifestyle for themselves rather than actually investing the funds. Because there are no regulations on reporting on hedge funds, it could take years before investors determine that hedge funds aren’t performing up to their expectations.

Seek Independent Verification

Understanding hedge funds can be difficult even when they’re completely legitimate, but hedge fund scammers take advantage of the fact that hedge fund reporting is minimal to mislead investors or misrepresent performance entirely. If you’re considering an investment hedge fund, look for verification of the hedge fund performance from an independent third party.

Some hedge fund specialists recommend a hedge fund consultant to help with the process of understanding hedge funds; if you do use a hedge fund consultant, make sure he is a truly independent consultant. Some hedge fund consultants receive a fee or bonus for referring a specific hedge fund, while others are actively employed by the hedge fund to present false information to potential investors. Regardless of the manner in which the consultant is misrepresenting the hedge fund, this type of representation is definitely a conflict of interest, and you should seek independent verification by an uninterested third party before investing in hedge funds.