Hedge fund managers work long and hard for every basis point of return they achieve. Therefore, it often comes as a surprise to managers to learn that they do not have plenary rights in their performance information. Such information is not fully portable. See “Portability and Protection of Hedge Fund Investment Track Records
,” Hedge Fund Law Report, Vol. 4, No. 40 (Nov. 10, 2011). Investors often require performance information to be presented in a composite, while managers often think about performance per fund or per strategy. See “A Step-By-Step Guide to GIPS Compliance for Hedge Fund Managers
,” Hedge Fund Law Report, Vol. 4, No. 44 (Dec. 8, 2011). And, as a default rule, regulators require performance to be presented net of fees, which, among other things, complicates apples-to-apples comparisons among funds with different fee structures. See “Can Hedge Fund Managers Use Gross (Rather Than Net) Results in Performance Advertising? (Part One of Two)
,” Hedge Fund Law Report, Vol. 6, No. 41 (Oct. 25, 2013). However, there are exceptions to that default rule – circumstances in which regulators permit managers to present performance information gross of fees. It is important for hedge fund managers to understand the existence and limits of situations in which they can present performance information gross of fees, for at least two reasons. First, as managers hardly need to be reminded, performance remains central to marketing and capital raising. See “Why and How Do Corporate and Government Pension Plans, Endowments and Foundations Invest in Hedge Funds?
,” Hedge Fund Law Report, Vol. 6, No. 14 (Apr. 4, 2013); “Why and How Do Family Offices and Foundations Invest in Hedge Funds?
,” Hedge Fund Law Report, Vol. 6, No. 1 (Jan. 3, 2013); “Why and How Do Sovereign Wealth Funds Invest in Hedge Funds?
,” Hedge Fund Law Report, Vol. 6, No. 13 (Mar. 28, 2013). Second, regulators are taking a harder look at performance information in private fund marketing materials and activities, as Norm Champ, Director of the SEC’s Division of Investment Management, explicitly stated in a September 12, 2013 speech at the Practising Law Institute. Accordingly, this article – the second in a two-part series – describes three circumstances in which hedge fund managers may present performance information gross of fees; analyzes four “hard cases” involving presentation of hedge fund performance information that do not fall neatly within the scope of no-action letters or other guidance; and discusses two categories of best practices that all managers should consider when presenting performance information. The first article
in this series provided an overview of relevant law, rules and SEC authority and offered practical guidance on calculating and presenting net performance results.