SEC Warns Investors of Hedge Fund Dangers

The Securities and Exchange Commission put up a Web site Wednesday disguised to look like an offering from a hedge fund to warn unsophisticated investors about the danger of fraud in the $500-billion industry.

The SEC’s Office of Investor Education has used the gimmick of bogus Web sites before to alert investors about other financial investment risks, such as Internet stock scams.

The site for what the SEC calls the GRDI Select LP hedge fund is the first to target the largely unregulated hedge fund industry, which is under SEC review and has been the subject of 26 enforcement cases over the last five years, the SEC said.

“There is an attraction to hedge funds now, with the market down,” said Susan Wyderko, director of investor education at the SEC. “There is the thought that hedge funds would be able to make money, whereas traditional investments would not.”

The fake GRDI hedge fund -- pronounced “greedy” -- says it keeps its money in offshore accounts and is “positioned for a 22% return during the first quarter after launch.” When a Web site visitor clicks for an online application, a page pops up saying, “If you responded to an investment idea like this, you could get scammed!”

The SEC’s “investor alert” comes as the agency is deciding whether to extend its regulatory authority to hedge funds, which are mostly not subject to SEC oversight because they are designed for wealthy individuals who are considered knowledgeable about investment risks.

A hedge fund is a private investment fund that involves speculative investing in stocks and options as well as short selling, or betting on a stock’s decline. The SEC is conducting a fact-finding investigation of the hedge fund industry, interviewing hedge fund managers, consultants and foreign regulators.

At last week’s Senate Banking Committee confirmation hearing on his nomination to be SEC chairman, former investment banker William Donaldson cited a “distressing move” in which hedge funds were being made available to smaller investors.

“I think we need to know more about the way they are operating,” Donaldson said of hedge funds. “I believe the SEC has already started to look into this, and I would encourage that investigation.”