Are Hedge Funds Boiler Rooms?

Female hand touching a tablet.

When investing your money in a business, stock, or index, you want to ensure that it is reputable. Unfortunately, over the years, we’ve seen a lot of scams take place within the financial trading industry that has completely ruined it for the rest of us. These scams, called boiler rooms, have everyone on edge when it comes to investing. So, this leaves many asking: are hedge funds boiler rooms?

If you’ve wondered this yourself, you’re definitely not the only one. With how privatized and successful hedge funds are, many are left wondering if there’s something darker happening within those companies. For everything you need to know about boiler rooms, how to spot them, and if hedge funds are a part of this scam, keep on reading.

What is the Boiler Room?

Boiler rooms have been operating for decades, though one of their most famous representations was in the film The Wolf of Wall Street, where we saw huge stock market investors scamming people out of hundreds, even thousands of dollars.

They utilized pushy sales techniques, misleading nomenclature, and sometimes, just flat-out lies to scam those who were vulnerable. As awful as it is, that isn’t just the plot of The Wolf of Wall Street, that’s exactly how these boiler rooms operate.

Boiler rooms first got their name due to the fact that most of these scam operations were being conducted–you guessed it–right out of a boiling room or basement. This proved to be the perfect spot for such skeevy work, and, thus, the name was born and stuck.

Today, these operations may still happen in shady locations, but many aim to look more elaborate and trustworthy than that. Scamming nowadays is getting more clever than ever, and these boiler room companies are working hard to get your money.

Boiler room operators are going to go to great lengths to sell their products, even targeting people who have fallen prey to scams before. They know that these people are more vulnerable and susceptible to things of this nature, making it all the worse.

You’ll hear them guaranteeing ridiculously positive things about these investments, but they won’t want you looking up any information yourself–that’s how you’d find out you’re getting scammed, after all.

While we don’t see as many of these boiler rooms as we used to, there are still a few that are up and ready to scam you out of your hard-earned money. Today, the world has much stricter procedures and regulations regarding fake companies such as these, making it a bit more difficult for them to get away with their scams.

Plus, people are a bit more aware of the prevalence of scamming these days, making everyone more hesitant. But, again, that doesn’t mean these shady companies aren’t still operating today.

How Boiler Rooms Operate

The Securities and Exchange Commission revealed that boiler rooms rely primarily on cold calls to get investors’ attention. They call these people unsolicited, having never talked to them before. Without having this previous connection, the investor is unsure of the history of the company.

Having them on the phone right then and there adds pressure to listen to the caller and understand what they’re calling you about. Boiler rooms use this on the basis that investors would have no negative predispositions to the caller, as they have never communicated before. However, this also tends to mean that people don’t have positive predispositions, either.

From there, boiler room operators use tricky nomenclature and specific wording that you, the person on the other line, cannot verify yourself. But, you also cannot deny it, as there’s no information available. They will use overly positive language to describe these investments in ways that make it almost impossible to say no. High-return and no risk? What’s there to worry about?

Well, a lot of things. Often, their investments–if real–are extremely high risk and will undoubtedly have you losing money. Usually, the money that they are collecting is just going into their pockets, and any “securities” you purchased weren’t legitimate whatsoever. Boiler room operations will ask you for all your personal information over the phone, without any of it being protected, either.

Sometimes, they even get aggressive and use more forceful acts to get you to “invest” in their products. Not only is it frustrating, but it can be intimidating, too.

A businessman with his head on the table feeling tired working under pressure.

Are Boiler Rooms Legal?

When it comes down to boiler rooms’ legality, it really depends on what they’re doing and what their tactics are. Many of these boiler room operations are in fact illegal.

Primarily, though, all of them are violating the National Association of Securities’ Dealers rules of fair practice. These rules are specifically designed to protect investors from fraudulent schemes and unfair strategies, and this is entirely what boiler rooms are relying on to get their money.

Boiler room operations work to specifically make false, misleading, or blanket claims that they have no right to. Under these rules of fair practice, that is considered completely prohibited.

Anybody who violates these acts are subject to penalties, and, thankfully, the organization posts frequent lists detailing companies who have committed infractions or have gotten penalized. This way, you can see which companies are trustworthy and which ones keep trying to bend the rules.

Are Hedge Funds Boiler Rooms?

Long story short, no, hedge funds are not boiler rooms. Hedge funds, though privatized, are legitimate investment operations that work with myriad financial partners for funding and assets. However, people often do think hedge funds are scams because of the high-risk, high-reward factor, and the incredibly unbelievable success stories we’ve seen in this sector.

Plus, it is well known that this operation is not actively overseen by the Securities and Exchange Commission. This means that hedge fund investors aren’t going to be subject to as much scrutiny and regulation as other investment opportunities might.

Because these types of funds are not available to the public, they are privately owned and operated. This leaves hedge fund managers to essentially control their assets in whatever ways they want.

For many, this results in much higher fees and taxes than other investment opportunities. While one hedge fund may charge you 2% for a management fee and 20% for a performance fee, another could wave the management fee entirely and instead take 40% of your overall profit if they so choose. This kind of flexibility is exactly why people get concerned about hedge funds being boiler rooms, or, at the very least, scams.

What’s the Difference?

The main difference here is that one is perfectly legal while the other is not. Boiler rooms are not only legally wrong but morally wrong as well. They do not operate on any professional level, and their entire goal is to scam others out of their money. Boiler rooms make almost every penny that is “invested,” creating an extremely fraudulent environment.

While hedge funds might be morally a little bit iffy at times, there is nothing wrong with them legally. Hedge funds are operated out of extremely legitimately, elaborate company sites that work hard to build credibility and relationships with other investors.

This type of investment just simply isn’t for everyone–literally. But, just because hedge funds can be a bit shady, doesn’t mean they’re not legitimate. Plenty of people have made some serious cash investing in the right hedge funds. You just have to take the time to find the ones with what you want out of an investment.

Hedge fund operations are full of some of the biggest financial experts in the industry. Simply put, you have to be part of the best of the best to even start investing in the first place.

Because of this, the whole scheme seems shady, when in reality, it is just non-inclusive. People make so much money through hedge funds because these people are professionals. While they use some iffy techniques, hedge funds are definitely not boiler rooms.

A businessman talking on the phone as he analyzes data on his computer.

How to Avoid Boiler Rooms

Although hedge funds aren’t boiler rooms, boiler rooms are definitely still out there. Thankfully, finding them and avoiding them is a bit easier nowadays than it used to be. Here are a few things to look out for when getting these types of calls.

Unrealistic Promises

One of the first things you’ll probably notice is the unrealistic promises that are being made. Typically, these investments are going to appear as though you’ll make loads of money without putting any risk into it. But… how is that possible? Exactly.

This simply cannot be done, and it is one of the biggest red flags. If you hear them talking about being “low-risk and high-reward” it’s probably time to hang up the phone.

High-Pressure Tactics

These guys are going to do everything in the book to get you to buy their product. These high-pressure tactics are designed to get your attention and have you listen to what they have to say.

It isn’t uncommon for boiler rooms to call you multiple times, days in a row until you finally pick up and give the information they want. They may try calling you from different numbers, as well. If you show any hesitation, they will immediately take it and use it against you.

“How could you not want a deal like this one? How is it possible to pass it up?” They will ask these questions and make you feel as though you’re somehow in the wrong.

Little to No Information Provided

As we touched one earlier, these “companies” aren’t going to provide you any worthwhile information about the investments they’re trying to sell you. If you ask questions, they will give you vague responses that cannot be tracked back to them to be denied (nor confirmed).

If you ask too many questions, these people will start to become uncomfortable. That’s one of the biggest signs that you have a fraudulent investor on your hands. No trustworthy company is going to be reluctant about talking about their history or success.

Must Decide Now

Finally, these boiler rooms will make you feel as though you have to decide right that moment while on the phone with them. They will often craft a fake promotion, saying that if you wait any longer you won’t get the “incredible” prices they’re offering you now.

If you wait, they claim, the deals will change entirely. This puts pressure on you to make the decision right then and there. Boiler room operators know that if they get you off the phone without a deal, they’ll never get the sale. So, they try to never finish the call without pressuring you to buy something.

An entrepreneur using his cellphone as he takes down notes.

Investing in Legitimacy

When it comes to investing, you always want to invest in legitimacy. Take the time to do proper research about the company you’re thinking about investing in, see what others have had to say, and go with your gut. If you’re on the phone with someone and it just feels too good to be true, it probably is just a boiler room.

To get further clarity on what hedge funds are really like, as well as other financial investment information, check out our blog.

A visual representation of the rise and fall of value trends of a hedge fund.

Hedge Funds vs. ETFs

Hedge Funds vs. REITs