How Can Hedge Fund Managers Market Their Funds Using Case Studies Without Violating the Cherry Picking Rule?

Due diligence is a courtship process in which institutional allocators spend considerable time and resources getting to know a manager’s philosophy, people, processes and performance. Investment and operational due diligence focus not only on performance results, but also on how the manager achieved that performance. There is no more comprehensive or persuasive way to convey the “how” of a manager’s investment process than to walk investors through the lifecycle of actual investments – in other words, to present case studies. While managers often have compelling business rationales for telling their stories via case studies, SEC-registered investment advisers must contend with Rule 206(4)-1 under the Investment Advisers Act of 1940 – the so-called “cherry picking” rule – which prohibits an adviser from disseminating, directly or indirectly, advertisements that refer to specific past profitable recommendations. The first article in this two-part series describes the purposes and typical content of case studies; identifies the types of managers and strategies that use and benefit from case studies; and highlights risks associated with the use of case studies in marketing, including a discussion of the cherry picking rule. The second article discusses additional risks of using case studies and provides best practices for managers wishing to use case studies in marketing. See our three-part series on advertising compliance: “Ten Best Practices for a Fund Manager to Streamline Its Compliance Review” (Sep. 14, 2017); “Five High-Risk Areas for a Fund Manager to Focus on When Reviewing Marketing Materials” (Sep. 21, 2017); and “Six Methods for a Fund Manager to Test Its Advertising Review Procedures” (Sep. 28, 2017).

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