Recent SEC Enforcement Action Provides a Dramatic Example of Style Drift in the Hedge Fund Context

Style drift generally refers to a situation in which a hedge fund manager tells investors he will do X and instead he does Y.  At its worst, style drift constitutes a classic “bait and switch.”  A manager promises a safe and sober investment strategy and does something wild and risky.  In its more innocuous forms, style drift is a matter of degree.  A recent SEC enforcement action illustrates style drift of the former, more egregious, type.  While bad facts make bad law, this enforcement action nonetheless illustrates rather starkly one of the ways in which a hedge fund manager may depart from its representations, and the importance of identifying a manager’s outside business activities.  Our article on the matter, accordingly, will help investors ask questions in ongoing due diligence to ascertain the consistency of a manager’s actual investments with its represented investment strategy.

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