SEC to examine Investment Advisors for conflicts of interest

Fund allocators in Private Banking and so-called Hedge Fund of Funds have traditionally been a major source of investment money that found its way into the Hedge Fund sector. Both sources are widely spread internationally and have been subject to little or no supervision and regulation until now. There is also scant disclosure of the terms they exact from the funds they allocate money too and many investors - especially private individuals - did not know to ask the right questions and were also kept in the dark. So we welcome the decision by the SEC to examine whether firms that collect fees for funneling investors into hedge funds are properly overseeing client money and dealing with potential conflicts of interest (Wall Street Journal, 10 Sept 2010).

Fraud: Keneth Starr stole $50 million

Not a day passes without a headline about another investment scam.

Fraud: another Mini-Madoff gets unmasked

Not even law enforcement personnel is safe from the attentions of investment fraudsters.  Wayne Macleod's ponzi harvested US$ 43 million from duped investors.

Dangers of Performance Pay

News that a highly risky mortgage bond has found ready buyers illustrates the danger of paying financial advisers or money managers a performance bonus. This type of compensation encourages fund managers to take undue risks. As it is not their own money that is at stake they find it that much easier to take risky investment decisions. Should things turn out well they are in line to earn a performance bonus. On the other hand, should the investment under perform or even turn sour they have still been paid their regular salary for the duration. With a bit of luck and the gift of the gab they may well find an excuse for the poor result by pointing to difficult markets. At worst they are losing the mandate or their job.

Los Angeles Jewish-Iranian Community hit by suspected $500 Million fraud

The roll-call of investment scams and frauds gets longer by the day. This story illustrates that it is not enough to follow recommendations by friends and acquaintances or to be overly impressed by appearances.

Private Bankers lured with huge guarantees

The somewhat stronger financial markets that we have seen after the markets bottomed out in March 2009 have led to a scramble to hire experienced private bankers away from their present employers. Large guaranteed pay packages are offered as incentive to move. Naturally, their new employers expect them to move many - if not all - their existing customer portfolios. These pay packages put enormous pressure on the candidates to convince their customers of the benefits of moving their accounts. Clients are advised to be on the defensive when they get told of the purported advantages of moving their money to the new firm as the banker has every incentive to paint things in a rosy light. Guaranteed compensation also tends to push employees to produce revenue (commissions, fee income on investment funds and other products) at any cost - often to the detriment of performance in the client portfolios.

More on the subject: Your adviser is changing firms. Should you follow? (Wall Street Journal)

Callable Snowball Floater - another confusing investment

The structured investment product world is full of technical terms that make even the heads of many a seasoned investment pro spin. But how many individual investors - sophisticated or not - really understand all the terms of the structure when they sign on the dotted line before parting with their hard-earned money? And if the investment is made on their behalf by investment managers - do these professionals understand them? We would bet that 99 percent of those putting money into structured investment products did not read the full prospectus - and even if they did they probably would not be much the wiser as it needs a mathematical PhD to look behind the scene and understand the risk-reward ratio and underlying fees. What is even more dangerous is when these products are given a tempting and innocuous sounding name such 'Guaranteed Investment'. As we have recently seen, nothing is guaranteed in the investment world, even the obligations of governments are subject to modification as demonstrated in countries such as Argentina. And who would put all his money into Greek government bonds now?

No protection for Hedge Fund Investors

At least that seems to be the prevailing opinion in Austrian courts where investors who lost their money in Madoff funds marketed by a major local bank are told that they had accepted that hedge fund managers are allowed to make any investment. By signing a customer agreement that points out that investments in hedge funds can lead to total loss they lost their right to compensation.

Use and Abuse of offshore fund domicile

An expert opinion just published in Austria comes to the conclusion that an offshore fund domiciled in the Cayman Islands but managed in Austria can still be seen as legally domiciled in Austria. This is relevant in case investors in the fund want to sue the fund managers for negligence. The legal protection offered in offshore domiciles is often much weaker than the protection offered in the investor's home country. Even if the legal situation is less favorable it is very expensive for any investor to sue in the tax haven. Investment managers that want to do the right thing by their investors would be well advised to dispense with such legal (and tax) trickery.

Beware of trial balloons in IPO valuations

All-too-often promoters of IPO's use a gullible financial press to spread valuations for their planned initial public offerings that have little bearing to reality. High levels are used to soften up the institutions and retail investors and 'anchor' their price expectations. Once these levels are widely disseminated in the media they become a self-fulfilling reality from which 'concessions' can be offered during the proper offering period. The media usually do little but report the headline number - without questioning how it is derived and whether it can be justified in the first place. While the ultimate investors behind the institutional shareholders have little influence over the actions of their 'fiduciaries', individual investors are well advised to monitor the participation of their fund managers very closely.