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5 Steps to Detecting Fraudulent Investment Funds

February 05, 2012 | Comments: 0 | Views: 165

No one wants to believe that they can be taken for a ride, and most certainly not the many Madoff Fund's savvy investors. The reality, rogue investment managers are the best psychologists; they can easily project the right image, and cater to your emotions to get what they want. Fortunately, you can shield yourself from their traps by setting up a strategy. Just like a fire drill, you have to set it up before you need it. The strategy is based on five steps, where the first step starts long before meeting any potential investment manager.

Before and During the Meeting: The first step consists of preparing preventive questions to any potential investment manager. The questions will help you detect likely fraud, and allow you to be detached from any possible emotional manipulation. Here are some questions you may want to ask: How do you make the money? How are you able to get such great returns, when no other manager has been able to? How did you get the idea? Who are your other investors? Can investors have access to their accounts electronically? If the answer to this last question is no, don't invest no matter how attractive the investment.

You want to keep the manager talking. The more he talks the higher the chance you have of finding out if the investment is legitimate. For instance, if his statements are vague, or if he starts getting mad with you, he may be a crook. If he states the investment is closed to new investors, your research should stop here, even if he comes back later and offers to let you in.

After the Meeting: After the first meeting, if you still believe the investment is genuine, you should perform a light investigation. First, you must check if the investment fund is licensed and registered with the SEC at; a fund that is not registered with SEC, doesn't have to play with SEC rules. Madoff was able to overpass SEC scrutiny because he did not register his fund until 2006. Second, you must check who are the players in the fund: Are they composed of mostly family members? If so don't invest. Third, you must check the auditor to the fund. A small auditor firm, with only two people, cannot audit a billion-dollar fund with thousands of clients. Fourth, you must check if the manager is not founder of a feeder funds to his fund. These four steps, while they will take few hours of your time, should help you protect your money in the long run.

Conclusion: In short, to protect your hard-earned money from rogue investment managers, you have to prepare questions to all potential investment managers. If after the first meeting you believe the investment may be legitimate, you must check for SEC registration, nepotism, auditor size or existence of a feeder-fund to the fund. From my experience, rogue investment managers leave a trail of red flags, and it is up to us to find them.

Source: EzineArticles
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Article Tags:

Ponzi Scheme


Investment Funds


Detecting Fraud


Feeder Fund


Bernie Madoff



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