The recent investigation into Trio Capital Limited, which previously traded as Astarra Capital, by both ASIC and the Australian Prudential Regulation Authority (APRA) has got the industry murmuring.
Blogger John Hempton, in a now infamous post, detailed how after a 40-minute investigation he became concerned about the whereabouts of the assets of the Astarra Strategic Fund.
His consequent letter to the regulators kickstarted the current investigation, and while the industry awaits the findings there are those wondering why others hadn't taken note of the red flags.
And this goes for the other recent financial disasters, including Storm Financial and Westpoint on the local front, and of course the ponzi scheme to end all ponzi schemes, Bernard L. Madoff Investment Securities.
Select Asset Management chief investment officer Dominic McCormick said there were a number of clues as to the validity of a fund, however good or above average performance was not necessarily a warning sign.
"The fund could be doing something substantially different, but in a broader sense does the strategy make sense from an investment perspective?" he asked.
"But you really need to have investment knowledge to do this, and many mum and dad investors may not be in the position to make this decision."
McCormick said money managers needed to make sure that thorough due diligence was completed.
"It really depends on the type of fund. If it's a mainstream Australian equities fund you don't need to go to the same level of detail as you would for a hedge fund. But it's not a 'tick the box' approach," he said.
Another thing to look out for is the experience of the people involved in the fund.
"You can trust a brand name depending on the strategy, experience and credentials of the key people involved. For active management this should give you some confidence."
However, a big brand name for custody and administration is not always a guarantee.
Particularly in the situation of Storm, for example, "this is a case where a big firm stuffed up," McCormick said.
"Sometimes there is blind faith in large institutions and often this is misplaced."
McCormick recommended there be a segregation of assets.
"Managers should not be able to get to their hands on the assets. It is crucial that administrations and custody be fully outsourced. Investors should also look out for obscure service providers," he said.
Another issue to consider is if there are any major conflicts of interest.
"Is the multi-manager being paid more to put money into a fund than for others? Any rebate should be to the benefit of the investors and not themselves."
Investors should be able to get information on where their money is invested.
"If you can't get a full breakdown of the investments then something is wrong. Beware of charming managers too. You don't have to like someone who is investing your money. Charm is the tool of the fraudster."
Despite being aware of these red flags, McCormick pointed out that frauds and ponzi schemes are pretty rare in the investment industry.
"People need to be wary about the possibilities fraudulent funds, but large frauds are still one-offs."
The greater danger is that people may be reluctant to invest money now because they are afraid of fraudulent funds.
"It is a worry that people may react and just go to the big firms. It cuts down the ability to diversify properly."
