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While talking to a businessman I have no close connections with I discovered that he is invested in a private South African / Mauritian Forex Trading Fund. I currently live in Mauritius so am able to talk in person with an owner. There is not much public information available as fund is a closed one and is "invitation based". According to the owner and 5y report he has provided:

  • Minimum investment is 10k USD
  • Returns can be withdrawn every month and initial investment - after 3 months period
  • The company has being on the market for 10 years
  • According to the report, monthly returns range from 1% to 6% averaging at around 40% annual growth.
  • They provide an access to the dashboard with realtime overview of trades.

If there is no such thing as "trust" in this sort of things, how can I minimise a risk of fraud/pyramid, etc? Are there any official (authorities level) documents/registrations/financial reports that these companies should be able to provide apart from self written documents? Should there be a public agreement that can be provided to local law enforcement in case of a fraud? May be what questions should I be asking myself and the company to get closer to the clear picture.

Apart from the risk of scam I realise that currency trading is a hight risk business, and I'm not going to invest amounts of money that I'm not ready to lose.

Thanks in advance for any useful advices.

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    Monthly returns of 1 to 6% and 40% annual growth seems more like a Ponzi scheme than a forex trading scheme, – Dilip Sarwate Feb 20 '19 at 3:58
  • @Dilip Sarwate I guess there is no reliable way to verify that? – Vlad K Feb 20 '19 at 9:20
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    @VladK Any unrealistic return without a solid business case is definitely a Ponzi scheme. A company long standing history mean little, as anyone can buy a dormant company to claim that. – mootmoot Aug 19 '19 at 9:16
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Asset management is a category that the Financial Services Commission (FSC), which is the Mauritian government regulator for financial markets, lists as a licensed activity under code FS-1. Assets Management. Therefore, I would check whether the company purporting to manage funds hold any regulatory status there, as a first step in the due diligence process. https://www.fscmauritius.org/en .

Note: There is also a chance the firm might claim that forex is not a regulated activity in that country and thus they are exempt and potentially operating legally, but that is a poor excuse in my opinion as it is equivalent of being unregulated which begs the question as to why Mauritius was chosen if there are no regulatory protections in place for clients. Scammers will usually given clever responses to such questions, so caution is needed to determine whether it is a real offering or not. Even if a bonafide company, there would still likely be very high risks, beyond market risks related to currency trading. (p.s. In South Africa, forex is regulated: https://www.fsca.co.za/Pages/Default.aspx)

In the case of a dispute, any signed agreements would govern the terms of the relationship, but could still hold little weight if there is no enforcement from a competent court or if the regulator fails to take action. While local residents will likely have more rights that non-resident, many companies that are there are not able to solicit locals without being properly licensed by the FSC, I believe.

While high returns alone are not indicative of whether an investment is a scam or not, it can be a red flag if accompanied by unbalanced statements or claims that are materially false, such as promising any excess returns or other unreasonable assurances.

Therefore, my second step would be to read through their disclosure documents or related investment prospectus to see how balanced it is and any claims made. I would want to learn more about any purported trading strategy any associated audited track record including who performed the audit, and whether the results are actual vs hypothetical, indicative for a few or all clients, and gross or net of fees and trading costs.

Considering that this is an offshore jurisdiction, I would not feel as safe even if the company was licensed there with the FSC, compared to a more established major financial hub such as the US, UK or Japan etc..

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This can be any of the following schemes.

  1. Ponzi scheme.

  2. Any of the Forex trading scam schemes

  3. A pump and dump sales scheme fund, that trick misinformed investor using regression toward the mean to harvest money from the gullible greedy investor. It doesn't matter what kind of funds is it, all tricks are similar.

Here is how the scheme works regression toward the mean to construct the sales scheme.

  1. Say X funds portfolio is all penny stock, average the price one can split to X number of unit of priced $1000, the funds charge a 1.5% annual fees. Before the fund started selling, they pump the penny stock and caused the fund price bloated to $1100.
  2. End of year 1, they initiate a dump on some portfolio, X fund lost 40% of the value, now it is $660
  3. End of Year 2, X funds pump and raised to $800. From the Year-to-year percentage, this is 800/660 21% gains.
  4. End of year 3, X funds pump again for to $900, looks like 12% gains
  5. End of year 4, X fund portfolio return to $1000, wows, gains 11%

This cognitive issue is very common. Few people will investigate what is the mean/average value of a portfolio as it is pretty complicated. However, people will be fooled by looking at the portion of the gains, i.e. 21% + 12% + 11%, hey 44% gains. They didn't realise these are pump and dump.

If the sales chart is showing the capital investment value, it is exposed ASAP. This is why many mutual funds only show performance percentile. This can be done easily in forex funds as well, usually, those funds only need to show you very high PTR (portfolio turn over) to lose the money in the first year. This is very common in countries with poor regulation.

Do take note that passive funds that use index stock as its portfolio, like Vanguard s&P 500 ETF, don't need to play pump and dump to scam the investor. Such funds will not show you outrages returns, except the long term cumulative returns compound effect is way better than speculative funds.

  • 1. "regression toward the mean" is a logical fallacy (doesn't exist at all for Wiener processes, and very weak for other individual stochastic variables). You may be confusing with "market correction cycles" which are not based in statistics by in psychology. 2. The "pump and regress" scheme that you propose can't work if there are substantial other participants in the market. 3. You don't need a "pump and dump" scheme, you just need to set up a bunch of funds each with a small investment in a different penny stock, then a couple years later promote the winners as if luck were skill. – Ben Voigt Aug 20 '19 at 18:09

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