Hedge Fund Managers May Be Liable for Performance Claims of Others

Performance advertising is a minefield for fund managers. Besides ensuring that their own performance is accurate, a recently settled SEC enforcement action makes clear that hedge fund managers and other investment advisers can be held liable for disseminating another adviser’s inaccurate claims. See also “Hedge Fund Managers Must Refrain From Combining Actual and Hypothetical Performance Results to Avoid Misleading Investors and Avert SEC Enforcement Action” (Feb. 11, 2016). When a registered investment adviser licensed proprietary trading strategies from another firm, it also began using performance information prepared by that firm. However, those performance claims were inaccurate because, rather than being based on actual track records as purported, they were hypothetical and backtested. See “SEC Settles Enforcement Action and Pursues Company Over Use of Backtested Performance Data” (Jan. 8, 2015). This article summarizes the SEC’s allegations against the relying investment adviser, as well as the terms of the settlement order. For more on backtesting, see “Under What Conditions Can a Hedge Fund Manager Present Hypothetical Backtested Performance Results?” (Feb. 1, 2013). For a discussion of performance advertising, see our two-part series on hedge fund managers’ use of target returns: “Common Practices, Benefits and Drawbacks” (Apr. 23, 2015); and “Legal Risks” (Apr. 30, 2015). For other performance advertising issues, see the HFLR’s articles on GIPS compliance claims; testimonials and social media; cherry picking and case studies; the use of gross performance results; and the use of other firms’ track records.

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