Ten Rules for Trading Alternative Funds


Trust is essential to the investment management process. But all too often companies make unforced errors in their advertising that undermine the credibility they work so hard to build.

That credibility is especially critical for alternative asset managers like hedge funds, private equity, real estate, and tangible assets where competition to build and maintain client relationships is fierce and trust is harder to win and easier to lose. . According to “Survey on the Next Generation of Trust,”For example, confidence in hedge funds was 59% and in other alternative investment managers only 60% among institutional investors. In contrast, institutional investors’ confidence in the main managers was 72%.

So what can alternative asset managers do?

First, they need to understand the SEC’s requirements under the Publicity Rule and associated non-action letters.

Last year, the SEC The Office of Compliance Inspections and Examinations (OCIE) identified the most frequent problem of compliance with the Advertising Standard found during SEC examinations. These were misleading statements about performance results, misleading personal presentations, and misleading statements of compliance with voluntary reporting standards. In recent months, SEC Announced Five Settlements Related to Advertising Rule Violations, all of which involved the misuse of testimonials on social media, and fined another company $ 1.9 million for misleading advertising. The company’s compliance staff was unaware that the marketing material included hypothetical and proven returns rather than actual results. Without the necessary disclosures, the SEC found the marketing misleading.

To avoid making similar mistakes, alternative asset managers should follow these 10 common sense rules when it comes to marketing and compliance.

  • Write and periodically review internal compliance policies and procedures and communicate them to all employees. Conduct staff training at least once a year to keep employees up-to-date on changes in rules and regulations.
  • Pay attention to SEC regulations, including specific rules announced through letters of no action and compliance cases that can illustrate pitfalls to be aware of. Sign up to receive alerts from consultants and law firms and Risk alerts directly from the SEC.
  • Inform potential clients of the fund’s objectives, risks, charges and expenses. The prospect should disclose all this in a simple and detailed way.
  • Check all written and electronic materials, including social media and websites, for compliance before posting. Not all compliance rules are intuitive, so you should have a robust review process in place.
  • Document reviews to satisfy record and bookkeeping requirements. If marketing materials include statements of performance, the internal statements and worksheets supporting those statements of performance must be retained for at least five years from the last publication or dissemination of the performance.
  • Never promise or guarantee future performance in any written, verbal or electronic communication.
  • Never claim that posted performance results meet voluntary performance standards without verification.
  • Never use misleading performance results, third party rankings, or awards in marketing materials. That always means deducting advisory fees, disclosing the limitations of the benchmark used, and explaining whether the performance results are hypothetical, proven, or actual. In many cases, the same results, rankings or awards may be included as long as they are accompanied by appropriate disclosures.
  • Never carefully choose profitable stock picks or recommendations in person-to-person presentations.
  • Never use testimonials or sample reports as endorsement of services or advice.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of the CFA Institute or the author’s employer.

Image credit: © Getty Images / erhui1979

Sidney Hardee, CFA

Sidney Hardee, CFA, is the managing partner of Hardee Brothers, LLC. He has a broad base of experience in global portfolio management, market research, and quantitative analysis. Hardee is a former business manager at Bank of NT Butterfield in Bermuda, where he led its derivatives and fixed income trading initiatives. He began his career as a market analyst at Salomon Brothers focused on the European bond markets. He later joined Lehman Brothers in both New York and London as a bond trader. He was also vice president of the global rates strategy and credit markets trading groups at JPMorgan. Hardee holds a BA in economics and mathematics from Yale University and an MA in applied statistics from Columbia University. He is Chairman of the CFA and a member of the CFA Society New York Alternative Investments Committee and the United States Investment Performance Committee (USIPC) for Global Investment Performance Standards (GIPS). He is a member of the advisory board of the Master of Science program in financial risk management at the University of Connecticut School of Business (UCONN).

Adam DiPaolo

Adam DiPaolo is Associate General Counsel and Senior Consultant with Ascendant Compliance Management. Designs practical solutions to manage regulatory challenges faced by hedge funds, private equity funds, fund of funds, and other investment advisers. In addition to providing compliance services such as annual compliance program reviews and mock audits, it established Ascendant’s Section 13 reporting capabilities and EDGAR file agent services. Writes and maintains corporate files ranging from Forms ADV and PF to Forms 13F and 13H. DiPaolo also provides cybersecurity risk management services to Ascendant clients as part of the Ascendant technology team. These services range from network vulnerability scanning to on-site cybersecurity risk assessments and assistance in implementing the NIST cybersecurity framework. He is a Certified Information Systems Auditor (CISA®) and is Certified in Risk and Information Systems Control (CRISC ™). DiPaolo practiced corporate law prior to joining Ascendant and has extensive experience in both the public and private sectors. He earned his BA from Pitzer College, his JD from UC Berkeley – Boalt Hall School of Law, and his LLM in tax from New York University School of Law. He is a member of the New York State Bar Association.



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