Aug. 14–As part of his first widespread investigation of hedge funds, Secretary of State William F. Galvin yesterday filed civil lawsuits against promoters of three funds that he claimed offered therisky investment vehicles illegally in Massachusetts.
The funds named in the complaints allegedly used fraudulent offering documents or unregistered investment advisers acting as hedge fund managers.
Hedge funds are private investment pools that are loosely regulated compared to mutual funds. They employ riskier techniques to achieve returns, including short selling — selling borrowed securities in the hopes they will decline in value; hedging, or covering investments to limit losses; and investments in complex financial instruments such as derivatives.
While the use of such sophisticated investment techniques can produce greater returns, hedge funds typically expose investors to greater risk. They are generally open only to wealthy individuals who meet certain qualifications and institutional investors.
“Even reputable hedge funds are high-risk investments meant only for sophisticated investors with money they can afford to lose,” Galvin said in a statement. “Hedge funds have become more prominent and popular in recent years based on reports of higher returns than those of registered investment companies. These returns can be and often are spurious.”
In one complaint, Galvin charged the operators of the Hercules Hedgehog Fund with failing to disclose to investors their “minimal qualifications,” the fact the fund sought to profit from technology stocks, and making misrepresentations on a website.
Galvin said investors in the fund lost 90 percent of their investments.
In a separate complaint, Galvin charged the Futronix Futures Fund of Reston, Va., with striking a deal with a Massachusetts broker to find investors in exchange for a percentage of profits. The transactions weren’t approved by the broker’s firm, and the investors he attracted weren’t properly qualified. They lost $300,000 of a total investment of $350,000, the complaint alleges.
Accredited investors must have earned $200,000 over the past two years — or $300,000 with their spouse — and expect to earn the same amount in the current year. Alternatively, they can show a net worth of at least $1 million.
“All of a sudden, the middle class has become cognizant of hedge funds, so we have as well,” said Matthew Nestor, director of Galvin’s Securities Division.
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