Is man inherently evil? Maybe that's too big a question.
Are members of the securities industry inherently evil? Will they do or say absolutely anything to get their hands on your money?
Obviously, it would be unfair to make such a blanket characterization, but sometimes you really have to wonder.
Consider these items:
Item #1: A study by two finance professors estimated that 10% of the returns of hedge funds reported to a standard database were "distorted." The authors concluded that "[T]his suggests that misreporting returns is a widespread phenomenon."
Translation: The practice of lying about hedge fund returns to make them appear more attractive than they are is a common practice.
Item #2: Another study concludes the hedge fund industry "is vulnerable to entry by managers who have no particular skill, but whose lack of skill is difficult to detect based solely on their track records. In other words, the hedge fund industry has a potential lemons problem."
Translation: A con artist can easily set up a hedge fund, make it look like he is adding "alpha," reap the rewards of huge fees and live happily ever after when the fund blows up.
Item #3: A third study found that "incomplete and inaccurate disclosure of important information is not uncommon among a sample of funds selected for research by clients of a major due diligence firm."
Translation: Lies, lies and more lies.
Item #4: Billionaire Raj Rajaratnam and others were arrested on October 16, 2009 and charged with using inside information that permitted the $7 billion hedge fund at Galleon Group in which he was a partner to reap $12.7 million in profits. These charges are allegations only and have yet to be proven at trial.
Translation: This item is the least surprising. The only way to get an edge in an efficient market is to illegally use inside information.
The bottom line transcends "buyer beware." This is an industry where the end justifies the means. The only expertise they have is the ability to transfer your wealth to their pocket.
Not every sheep must be shorn. You should be the exception.
Dan Solin is the author of The Smartest Retirement Book You'll Ever Read.
The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.