Due diligence pro Randy Shain on how investors should weigh the risks
With the $2 trillion hedge fund industry just weeks away from being able to openly advertise and market individual funds and strategies, investors could be facing a whole new set of challenges.
As the 80-year ban on hedge fund advertising is lifted, there is some concern that more information on alternative investments could lead to increased exposure to risky investments.
Randy Shain, founder of investigative due diligence firm BackTrack Reports, said that the new hedge fund advertising will definitely mean new challenges and opportunities.
On whether hedge funds will target individual investors through advertising:
Mr. Shain: Advertising works, no question about it. And I have to think there are some people somewhere who will be influenced by hedge fund advertising. But I think the vast majority of large hedge funds are looking for institutional money and not individual high-net-worth investors.
On what kind of hedge funds will advertise once it becomes legal:
Mr. Shain: The vast majority of hedge funds are not going to look to market or advertise anyway. The ones that are will be smaller or startups with zero to $100 million under management. Those are the types of hedge funds that might be looking to market to individuals. But, also looking to market to individuals are criminals, and that's kind of the fear right now.
On warning signs investors should look out for in alternative investments:
Mr. Shain: Some of the biggest red flags to watch for include if a company calls itself a hedge fund, make sure it is. Make sure the individual's credentials fit the firm. For example, I'm not in love with the idea of a real estate developer or an investment banker who starts a hedge fund because it's a way to make some money.
Also, you want to look out for anyone with a lot of legal judgments or litigation in their background.
The easiest thing to do is literally look at what they did before. Find out where they have been working and if they are even a real hedge fund.
