Commodity Watch: How Fraud Thrives in the Dark

<div class="grid grid--33-66-col"><div class="col"><img loading="lazy" src="/getContentAsset/061c994a-a452-418f-bfa0-f2cf3cf5c577/cb87803a-320c-480f-ab75-7b9029eaaf79/Ahmad-Al-Sati-new.png?language=en" alt="Ahmad Al Sati - insights" title="Ahmad Al Sati - insights" style="width: 180px" class="fr-fic fr-dii"></div><span style="font-size: 12px"><div class="col"><strong>AHMAD AL-SATI<br></strong>PORTFOLIO MANAGER<br><br><p>Ahmad is the President and Portfolio Manager for Gemcorp Capital Advisors LLC, based in New York.&nbsp;<br><br>Ahmad has spent most of his career in the global credit markets. Prior to Gemcorp, Ahmad was President of Pandion Mine Finance and RiverMet Resource Capital, LP - a fund focused on investing in precious metals, where he was responsible for managing the investments and the day-to-day operations of the registered investment adviser.&nbsp;</p></div></span></div><hr><p>Fraud is up. According to the Federal Trade Commission, consumer fraud was up 4x between 2020 and 2024. Investment scams were the largest category of losses in 2024 at $5.7 billion, up 24% year-on-year. Crypto, AI and social media were the big enablers. The fear of missing out and a frothy market were also culprits. Individual investors were not the only ones hit. Bloomberg reports that a German pension fund (for 10,000 dentists) filed suit against its advisors, including the city of Berlin, after losing around 50% of its assets under management (near $1.3 billion) deploying capital into private transactions such as insolvent digital insurer Element and unsecured loans. These revelations come on the heels of private credit losses in the US resulting from fraud (such as First Brands and Bridgevoice).</p><p>Opacity remains a favoured tool for fraudulent activities. Enron used it. So did FTX. Private investments, mostly legitimate and accretive to investors, are also opaque. They remain little understood by the newer cohort of investors seeking alternatives even as the push to “democratise” alternatives continues unabated. Lack of visibility into fund liquidity, NAV calculations and portfolio composition is increasingly a risk for investors looking to benefit from alternatives, the benefits of which are measurable.</p><p>Thus, separating fraudulent activity from legitimate investing is essential. To do so, most fund investors must understand the underlying portfolio. Not because they can protect against fraud at the portfolio level. They can’t. They are reliant on the managers for that. Picking the right manager for the right strategy is the best protection against portfolio implosion. However, consistent, regular and comprehensive disclosures allow fund investors to better understand a fund’s portfolio and to review positions across funds. It allows them to observe valuation inconsistencies, deteriorating credit metrics and to generally assess liquidity. If a fund is increasingly illiquid (a lot of deteriorating assets), fund investors can use that information to better manage their own portfolio.</p><p>Here, registered funds (such as interval funds) may have an advantage. Among many regulatory protections, the Investment Company Act of 1940 mandates comprehensive disclosure requirements. These disclosures may then allow investors, current and prospective, to independently assess portfolios in conjunction with the information from the manager. The Act has protected investors for over 80 years, and it may yet offer the requisite scaffolding and protection that newer investors seek as they enter alternatives.</p><p>There is no panacea for fraud risk. But fund investors can mitigate that risk through active diligence and monitoring, by picking the right manager, the right strategy and diversifying across funds. Yet, you cannot manage what you cannot measure. Disclosure underpins measurement. As Justice Brandeis wrote 100 years ago: “sunlight is the best disinfectant”.</p>