How the 2008 Financial Crisis Led to Hedge Fund Losses
A hedge fund is a portfolio of investments that uses aggressive and diversified strategies domestically and internationally in an effort to out-perform the market. Hedge funds are set up as private investment partnerships. They typically require considerable initial investments, are limited to a certain number of investors and require that investors leave their money in the fund for at least a year or more. Hedge funds cater to wealthy, sophisticated investors. Though they may present investors with the opportunity to make a great deal of money because of their aggressive strategies, they can be risky at the same time.
When the financial crisis of 2008 hit America and the rest of the world, hedge funds suffered along with the rest of the market. Investors lost exorbitant sums of money because their investments were riskier than most and usually not diversified. Some say that the fact that hedge funds were previously unregulated contributed to the stock market decline. They bought large quantities of mortgage-backed securities, and when the housing market started to plummet, the underlying mortgages began to default. Hedge fund managers were initially not concerned, believing their interests were protected by a type of insurance called credit default swaps. As the number of mortgage defaults continued to rise, the sheer number of swaps collapsed the market for this type of insurance.
Hedge funds above $150 million are now required to register with the Securities and Exchange Commission (SEC) and are regulated under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Banks are also now limited in the number of hedge fund investments they can make and must use hedge funds on behalf of customers rather than their own profit margins.
Securities Arbitration for Hedge Fund Losses
Hedge fund investors who lost significant amounts of money during and after the financial crisis may be able to take action through arbitration proceedings or courtroom litigation in order to recoup their losses. Who is liable? Every case is different, but it is possible that the investment manager could be held liable if the portfolio was not diversified enough based upon the needs of the hedge fund investors. Other potential grounds for securities arbitration or litigation may include churning (excessive trading to generate commissions), unauthorized trades, unsuitable recommendations or trades and broker negligence.
Though hedge funds may be seen as risky, this does not mean that every loss is justified. Some hedge fund managers may have reacted to the stock market downfall by looking out for their own interests in opposition to the investors' interests. They may have looked to limit their losses and ended up causing even more damage to the people who were investing with them.
With our experience in the securities industry and understanding of the exact acts that constitute investment fraud and broker negligence, Napoli Bern Ripka Shkolnik, LLP stands prepared to offer the level of legal representation you need to properly handle a claim involving hedge fund losses. These cases can be particularly complex due because the claimant (wronged investor) had a high risk tolerance. It could be argued that seasoned investors should bear more responsibility when their investments go south. Our lawyers know how to fight back against such defenses in order to seek the compensation our clients deserve.
Representing investors across the U.S., Napoli Bern Ripka Shkolnik, LLP has an impressive track record that includes more than $3 billion in settlements and verdicts. If you would like to learn more, contact our office for a free initial consultation.