Hedge Funds May Yet Have Their Unpleasant Day in Court

The NASD, increasingly concerned that brokers may be wrongfully selling or using hedge funds for their professional clients, is now investigating hedge funds.

While mutual funds have gone through the trials and tribulations of the seeming never-ending mutual fund scandal these past three years, hedge funds remain largely unregulated - a point of contention for many in the mutual fund industry.

Now, hedge funds may have their own day in court, one they may not enjoy. NASD investigators are looking into whether investors are being goaded into risky investments, particularly through suspicious sales contests and non-cash incentives. Quoting Amy Lynch, an NASD special investigator, Bloomberg reports this morning that the self-regulatory body is specifically looking into sales of hedge funds to non-professional customers between early 2004 through May 31, 2005.

Even the high-net-worth "are not very sophisticated investors, and these are very complex investment pools," noted Robert C. Pozen, chairman of MFS Investment Management. "So, you'd really want to know whether the disclosures were sufficient.

"Selling funds-of-hedge funds in denominations of less than $50,000 is clearly an appropriate area for regulatory attention," Pozen, former vice chairman of Fidelity, continued.

Hedge fund assets have more than doubled in the past five years, jumping from $490 billion in 2000 to $1.03 trillion today.