Risks of Self-Dealing in Investment Funds
Self-dealing by fund managers is a serious risk that can undermine investor trust and confidence in the fund. Self-dealing occurs when a fund manager prioritizes their own interests over those of the fund’s investors, potentially resulting in financial losses for investors. Here are a few examples of self-dealing by fund managers:
- Insider Trading: Fund managers may have access to non-public information about public companies in which the fund is investing. If the fund manager uses this information to make personal trades or shares the information with others for their personal gain, it is considered insider trading and is illegal.
- Conflicts of Interest: Fund managers may have conflicts of interest when making investment decisions, particularly when investing in companies in which they have personal interests. For example, if a fund manager invests in a company in which they own stock or have other business relationships, it could be perceived as self-dealing.
- Excessive Fees: Fund managers may charge excessive fees or expenses to the fund, potentially resulting in lower returns for investors. If a fund manager uses the fund's assets to pay for personal expenses or to benefit themselves financially, it is considered self-dealing.
- Undisclosed Transactions: Fund managers may engage in undisclosed transactions with related parties, such as family members or business associates, to benefit themselves financially.
It’s important for investors to be aware of these risks and for fund managers to have strong governance and oversight processes in place to prevent self-dealing. This includes implementing robust conflict of interest policies, ensuring transparency in investment decisions and fee structures, and maintaining a culture of ethical behaviour. Additionally, investors should conduct due diligence on fund managers to ensure they have a strong track record of ethical behaviour and have appropriate controls in place to prevent self-dealing.