Another Hedge Fund Collapses Through Fraud
The San Jose Mercury News reported this week that a federal judge sentenced the manager of the Sunnyvale-based Asenqua Beta Fund and the Fireside LS Fund to 12 years in prison for defrauding local investors out of at least $6.5 million. Albert Ke-Jung Hu was found guilty in June of luring wealthy investors to his hedge funds by promising returns of 20 to 30 percent and falsely asserting that the funds were affiliated with well-known lawyers and auditors. He was arrested in Hong Kong in 2009 after having skipped the country to avoid capture. Before the sentence was announced, Hu pleaded for mercy from the judge. “We all make mistakes,” was what he said.
This incident compels me to revisit the topic of avoiding investment fraud. As I wrote last year, there are four simple things you can do to avoid getting fleeced by people like Hu. To repeat, they are:
- Make sure your share of the fund’s assets is held by an independent custodian. That way you can independently verify value. Hu’s funds would have failed this first test.
- Remember the adage, “If it’s too good to be true, it probably is!” Madoff claimed consistent returns of merely 10% per year, and we all know now that he was lying. What could Hu possibly be doing to guarantee 20% without taking inordinate risk?
- Stick to publicly traded securities that are listed on major exchanges. With more than 8000 different mutual funds available (according to the Investment Company Institute), it’s hard to justify the need to invest in non-public alternatives for most investors.
- Don’t put all your eggs into one basket. Even if your most trusted friend suggested an investment, common sense dictates that you not risk all your money on that one bet.
Why would anyone consider investing in a hedge fund in the first place, even a legitimate one? The costs are astronomical – most charge 2% of the asset base plus an additional 20% of any profits above a certain threshold – and in general their performance is no better than that of countless and much less expensive publicly-traded mutual funds & ETFs, according to a Vanguard study that I reported on last year.
Your investment portfolio is one of the most important sources of funding for your retirement. Don’t put it needlessly at risk.
Independent custodians do NOT verify value and have no obligation to do so. Custodians merely pass the investors money on to the hedge fund manager and then wash their hands of whatever happens from that point.
It’s the investment company managing the fund that is required to value its assets. At the same time, many independent custodians don’t like taking on the risk of holding non-publicly traded assets with non-verifyable valuations. Possibly as a result, most hedge funds maintain their clients’ assets directly. Whether or not a custodian is independently verifying valuations, it’s always safer to have multiple independent parties watching over your assets.