Why Hedge Funds Are a Risky Investment

One of the riskier types of investment opportunities that could be presented to you by your financial advisor is hedge funds. These can be a great way for investors to generate high returns, but they aren’t without risk.

If you suffered substantial losses after investing in hedge funds, you may be entitled to repayment for these losses—but only if you can prove your broker is at fault. Continue reading to learn more about why hedge funds are risky and how to go about recovering your investment losses in some cases.

Risks of Hedge Funds

Hedge funds were conceived as a way to offset some of the risk of investing by “hedging” the bet—i.e., allocating funds in the opposite direction of an investment group’s main focus. 

Specifically, the original hedge funds advocated the use of the long/short equity model, which involves hedging the risks of a long-term investment by short-selling shares of unrelated securities. 

However, modern hedge funds have largely deviated from the logic of the long/short equity model in favor of riskier methods. 

Some of the reasons hedge funds can pose higher risks than the more conservative investment strategies include:

  • The Use of Leverage – Leverage is the practice of borrowing money to increase one’s position on an asset in the hopes of multiplying potential gains. Although leverage can do just that, it can also be disastrous when it works in the opposite direction. 
  • Riskier Asset Classes – Modern hedge funds often pursue investments in riskier derivative assets—such as futures and options—that can be subject to high degrees of volatility and risk. 
  • Less Strict Scrutiny – Finally, hedge funds are subject to less rigorous regulations from the SEC than other types of investment groups, such as mutual funds. 

How to Recover Losses Related to Investment in Hedge Funds

Although it can be difficult to recover financial losses, there are legitimate pathways for those who’ve been the victim of fraud committed by a broker or money manager. 

For example, investors can file a claim for arbitration or mediation through FINRA as a means of attempting financial recovery. Arbitration is often far less expensive and more expedited than traditional litigation. 

Fortunately, you can engage an experienced attorney for professional advice and counsel on how to proceed during arbitration or mediation. 

Contact an Investment Loss Lawyer Today

If you invested in hedge funds on the recommendation of your broker but you suffered considerable losses as a result of their negligence or misconduct, you may be entitled to full restitution. 

Contact an experienced investment loss lawyer at Wolper Law Firm, P.A. to find out more about your options for a FINRA arbitration complaint. Call our office at 800.931.8452 or fill out our secure contact form and we’ll reach out to you to find out more about your hedge fund–related investment losses

Attorney Matthew Wolper

Attorney Matthew WolperMatt Wolper is a trial lawyer who focuses exclusively on securities litigation and arbitration. Mr. Wolper has handled hundreds of securities matters nationwide before the Financial Industry Regulatory Authority (FINRA), American Arbitration Association (“AAA”), JAMS, and in state and federal court. Mr. Wolper has handled and tried cases involving complex financial products and strategies ranging from traditional stocks and bonds to options, margin and other securities-based lending products, closed/open-end mutual funds, structured products, hedge funds, and penny stocks. [Attorney Bio]