The Investment Advisers Act of 1940 generally prohibits a hedge fund manager, regardless of whether it is registered as investment adviser, from engaging in any activity that is fraudulent, deceptive or manipulative. The staff of the U.S. Securities and Exchange Commission has defined these activities to prohibit certain forms of advertising.
Hedge fund managers must be careful to disclose all material facts when presenting past performance to prevent unwarranted inferences and may distribute either actual performance results or model performance results to prospective investors.
When distributing performance results, the following guidelines should be followed to avoid such performance results from being deemed misleading:
- Discuss the effect of any material market or economic conditions on the performance;
- Deduct performance and management fees, sales loads, brokerage commissions or other expenses that the investor would have paid;
- Indicate whether and to what extent the results reflect the reinvestment of dividends, gains or other earnings;
- Disclose the possibility of loss;
- When comparing results to an index, discuss all material differences relevant to the comparison; and
- Discuss any material conditions, objectives or investment strategies used to obtain the results portrayed.