As excerpted from FBI.gov
“Hedge funds offer many benefits, but because of the volume of assets under management, they draw special attention when they fail. Hedge funds can fail for a variety of reasons.” “…Of most importance to law enforcement and regulators, however, is when hedge funds fail due to fraud.”
“Investor Due Dilligence – Red FlagsDepending upon its investment strategy, each hedge fund has its own unique investment risk and must be assessed based upon its own merits. Investors should fully understand the risk in investing in hedge funds and should conduct appropriate due diligence before investing.”
“Examples of due diligence could include:
Reviewing www.SEC.Gov for past regulatory actions against the fund manager;
Reviewing state securities agencies web-sites;
Reviewing federal district, bankruptcy and appeals court records through www.uscourts.gov/courtlinks;
Locating and speaking with fund administrators and noting their independence;
Being sure a reputable independent accounting firm performs an annual audit; and
Hiring a due diligence firm to perform a more thorough background check”
Read more here.