Editor’s Note: Janet Tavakoli is the president of Chicago-based Tavakoli Structured Finance and the author of Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street.

Even Warren Buffett will try to buy an investment fund when the price is right, but it rarely is.

Buffett tried to buy Long Term Capital Management (LTCM), a hedge fund that famously blew up in the late 1990s, but the Federal Reserve Bank, the U.S. central bank, organized a bailout instead. LTCM’s management was honest but unlucky. Lately, we’ve heard a lot about hedge funds and other types of investment funds that have been both unlucky and dishonest.

The overwhelming majority of these managers are men, because the world of finance is dominated by men. A woman can feel at a disadvantage, but when dealing with the wrong crowd, even savvy, male money managers sometimes feel at a disadvantage. How can you tell if you should be worried?

These nine warning signs alarm the savviest money managers in the world:

• A cult figure. If the manager is a cult figure and has no independent third party that verifies his returns, you are probably already in trouble. Do-it-yourself reporting doesn’t cut it when it comes to your money.


• The fund can hang onto your money. This is known as a “gate.” If the fund manager can prevent you from withdrawing your money, or if the fund manager can change the rules later to prevent you from withdrawing your money, you need a very good explanation why this is necessary. (Sometimes there is a legitimate reason for this, such as in a real-estate partnership, but it is rare.) If you invested in the stock market, you can get your money anytime you want, even if you have lost money — it is your decision. Yet, money managers with poor performance will tell you that you cannot have your money back and it is for your own good: The fund’s value has taken a beating; if you sell now you will get a lousy price; hang on and things will get better. This may be true, but it is also possible value has been permanently destroyed due to an investment mistake, or worse, the money is missing. In any case, it is your money, and you should decide when you get it back and how much of a loss you are willing to take. Do you want to trust the judgment of someone who has just proven he has misjudged the market? 


• No-name banks and accountants. It is bad practice if a manager does not separate the investment funds from his other accounts in a custodial account with a well-known bank. He should also have a credible auditor from a large, well-known accounting firm.

• Poor transparency. It is so hard to tell what you are invested in that your money manager might as well be wearing a flannel nightgown.


• No visible risk controls. If you ask how your manager is controlling the risk and you don’t get an answer you can understand with some proof to go along with it, then your manager probably isn’t managing anything; he’s probably manipulating you.