Hedge Fund Law Blog» Blog Archive » Requirements for Hedge Fund Performance Reporting

Main conclusions from the SEC Clover Capital no-action letter.

With regard to model and actual results, the staff believes that a hedge fund manager is prohibited from publishing an advertisement that:

1. Fails to disclose the effect of material market or economic conditions on the results portrayed (e.g., an advertisement stating that the accounts of the adviser’s clients appreciated in the value 25% without disclosing that the market generally appreciated 40% during the same period);

2. Includes model or actual results that do not reflect the deduction of advisory fees, brokerage or other commissions, and any other expenses that a client would have paid or actually paid;

3. Fails to disclose whether and to what extent the results portrayed reflect the reinvestment of dividends and other earnings;

4. Suggests or makes claims about the potential for profit without also disclosing the possibility of loss;

5. Compares model or actual results to an index without disclosing all material facts relevant to the comparison (e.g. an advertisement that compares model results to an index without disclosing that the volatility of the index is materially different from that of the model portfolio);

6. Fails to disclose any material conditions, objectives, or investment strategies used to obtain the results portrayed (e.g., the model portfolio contains equity stocks that are managed with a view towards capital appreciation);

7. Fails to disclose prominently the limitations inherent in model results, particularly the fact that such results do not represent actual trading and that they may not reflect the impact that material economic and market factors might have had on the adviser’s decision-making if the adviser were actually managing clients’ money;

8. Fails to disclose, if applicable, that the conditions, objectives, or investment strategies of the model portfolio changed materially during the time period portrayed in the advertisement and, if so, the effect of any such change on the results portrayed;

9. Fails to disclose, if applicable, that any of the securities contained in, or the investment strategies followed with respect to, the model portfolio do not relate, or only partially relate, to the type of advisory services currently offered by the adviser (e.g., the model includes some types of securities that the adviser no longer recommends for its clients);

10.Fails to disclose, if applicable, that the adviser’s clients had investment results materially different from the results portrayed in the model;

via Hedge Fund Law Blog» Blog Archive » Requirements for Hedge Fund Performance Reporting.

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