How does an investor assess the accuracy of marketing material provided by a hedge fund manager to make a properly informed investment decision? Factors like whether a manager’s past performance numbers or track record is accurate and isn’t cherry-picked to reflect just positive results?
The issue is critically important for investors and its solution isn’t as simple as it may seem.
Hedge fund interests are sold in the U.S. pursuant to a private placement rules.
Hedge fund investors are often required to sign extensive confidentiality agreements by managers during the investment process.
Once executed, these confidentiality agreements can limit an investor’s ability to share specific manager or fund information with third parties.
Also, certain advisors to investors who may have access to manager-specific information under these confidentiality agreements may have limited information related to a particular manager.
Being an investor in a hedge fund can be a lonely experience.
The good news is that the area of marketing and advertising by investment managers is something that has gotten a lot of attention by the SEC over the years.
The SEC has issued extensive rules and interpretations designed to prevent activities by managers that might be deemed fraudulent, deceptive or manipulative related to the sale of their fund interests.
Hedge fund marketing and advertising material, whether it’s included in a manager’s PowerPoint presentation, letters or other communication with existing or prospective investors, is subject these antifraud rules.
These SEC rules and guidance provide important guide posts for how managers are supposed to present their marketing material. For example, these rules and guidance generally
- Limit a manager’s use of testimonials;
- Limit a manager’s ability to cite past specific recommendations without properly qualifying the information; and
- Require the presentation of manager performance data net of fees.
Now whether a manager follows the rules or not is obviously important.
The consequence of an investor relying on marketing material that is misleading or deceptive related to such things as a manager’s track record, can be disastrous.
Investors can never be too careful when their hard earned money is at stake.
In my opinion, the anti-fraud rules are an important filter that can be used by investors and their investment advisors to critically analyze a manager’s marketing material to ensure its compliance with SEC guidance.