By: Jack WaymirecloseAuthor: Jack Waymire Name: Jack Waymire
Email: jack@paladinregistry.com
Site: http://paladinregistry.com
About: Jack writes for the InvestorWatchdog website and Worth magazine. He worked in the financial services industry from 1976 to 2004. For twenty of those years he was the president of a Registered Investment Advisory firm and a Broker/Dealer. Jack is the author of Who's Watching Your Money? The 17 Paladin Principles for Selecting a Financial Advisor and is a co-founder of PaladinRegistry.com.See Authors Posts (87) | September 22, 2009 | Investor Information

Watch-out the next time your friendly financial advisor recommends you invest in a registered mutual fund that re-invests your assets in unregistered hedge funds. There are all kinds of problems with this recommendation, but we will focus on three.

First, you are going to pay an incredible amount of fees and commissions. The advisor wants to be paid, the advisor’s company wants to be paid, the mutual fund wants to be paid, and the hedge fund wants to be paid. Guess where all of those fees and commissions are coming from? You are right if you answered your assets.

Second, the mutual fund may appear to be legitimate because it is registered with the SEC. However, the mutual fund invests in unregistered hedge funds. This lack of registration creates additional risk for you. Keep in mind Bernie Madoff ran a hedge fund. All funds should be registered before you invest in them.

Third, hedge funds were originally developed for wealthy, sophisticated investors who had high tolerances for risk. The funds used short selling, arbitrage, hedging, leverage, derivatives, currencies, private placements, and international investments to generate the returns they needed to justify their exorbitant fees. Taken together these investments represent extraordinary amounts of risk.

No matter how high the track record, how great the references, or how many Persian rugs the advisor has in his office, you have to be exceptionally cautious when you invest in a registered mutual fund that invests in unregistered hedge funds.