One piece of financial advice that is well known among the cognoscenti but less obvious to some folks in Florida is that you can do 90% of your investment due diligence just by looking at a fund’s name. The tricky thing is that the scale sort of wraps around, like so:
(1) Name that specifies how safe it is (“Global Securities Safety-First Principal Protection Ultra-Conservative Fund”) = probably a Ponzi scheme;
(2) Mythological figure, geological feature, wealthy neighborhood, etc. = you’re good, past performance should predict future returns;
(3) Word from Tolkien = dealer’s choice;
(4) Name that specifies how unsafe it is (“Death Star,” “Terrible Ideas Investment Management”) = probably not a great sign but maybe?
“White Elephant Trading Co. LLC Conservative Fixed Income Fund” is the first case I have ever seen of flunking at both ends – it is both “an object, scheme, business venture, facility, etc., considered to be without use or value” and a Conservative Fixed Income Fund. It was also the dream of one Gurudeo “Buddy” Persaud, who promised* investors high and stable returns with one teeny little catch:
32. However, Persaud did not tell investors that in making at least 90% of his trading decisions, he relied on directional market forecasts based on lunar cycles and gravitational pull provided by an internet service.
33. The primary principle underlying Persaud’s trading strategy was that the gravitational pull between the moon and Earth affects mass human behavior, which in turn affects the stock markets. For example, Persaud believed that when the moon is positioned so there is a greater gravitational pull on humans, they feel down and are therefore more inclined to sell securities in the markets.
34. Persaud failed to disclose he would trade investors’ contributions based on lunar cycles and gravitational pull between Earth and the moon.
I don’t know. I didn’t take CFA Level 2 so my gravity-based market-prediction skills aren’t fully honed but this seems reasonable to me? Lots of real hedge funds trade on signals and correlations that sound about as silly as that. And the SEC doesn’t come after them to make them disclose the details of their strategies to investors. WHERE IS THE PROBLEM?
Sadly, the problem seems to have come when Persaud went beyond this foolproof investment strategy into Ponzi territory, spending* about half of his $1mm fund on his personal expenses and much of the rest on paying returns to early investors out of later investors’ contributions. (Also the astrology thing seems not to have worked which whatever lots of other strategies didn’t work either.) Anyway the SEC caught up with him today and brought to bear both a lawsuit and withering sarcasm:
“Persaud preyed on people who trusted him by promising high and steady returns while hiding his unconventional trading strategy,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “When Persaud blatantly lied to investors and hid their losses through a Ponzi scheme, he should have known that an SEC enforcement action was in the stars.”
* Oh, “allegedly.” Allegedly.**
** Also that footnote was used twice.