HEDGE FUNDS
Operations & Compliance: Marketing

What good is the best performance record around if few people ever see it? Marketing, advertising and promotion are key elements in a successful hedge fund business plan. But unlike almost every other type of business on the universe, private (exempt) hedge funds face significant restrictions on marketing, advertising and promotion.

An original article by Robert A. Green, CPA & CEO

Only registered/public funds, like mutual funds and investment companies, may market, advertise, and promote themselves and their performance records to the general public. In fact, the media is filled with these ads.

But non-registered/private (otherwise known as exempt) hedge funds (and the great majority are exempt) may only market, advertise and promote themselves and their performance records in very restricted manners.

In a nutshell, the rules for exempt funds state that in order to avail oneself of the private exemption to the public securities rules, a hedge fund must prove it will remain private and not public. That means it can't advertise to the public.

Who is the public and who is not?

The public is everyone in the world except people and institutions you already have established (and be ready to prove it) a "pre-existing relationship" with. Obviously, good friends and family are not a hedge fund's public.

What about the Internet?

If a fund distributes a communication message through any channel available to the public, that's probably a public communication. For example, promoting a hedge fund on the Internet may be a public communication, since anyone may be able to access that message.

It's possible to maintain privacy (avoid the public) if that Internet message is restricted to people and companies a fund has a pre-existing relationship with. For example, if a fund has a password protected and secure Web site, giving access to vetted pre-existing condition clients only, that may pass muster. Click here for more information on Posting Data on Web sites.

Promoting a private hedge fund in a public chat room or other public forum are clearly problems and don't pass muster.

What about brokers?

Giving a communication to others who do the (dirty) work for you - distributing your message to the public - may also be a problem; unless that distributor of information passes muster on the rules.

Brokers are entitled to distribute private hedge fund information to their own customers (investors), even though the hedge fund itself has no pre-existing relationship with the broker's customers. There are separate rules for brokers and other types of information agents. Click here for more information.

Brokers are also sanctioned by the NASD and broker ads for private hedge funds must include every possible conflict of interest. Those ads must list all conflicts of interest (and many other disclosures) from the hedge fund's offering memorandum. The ads are just a little shorter, but not much sweeter.

What about listings on performance record sites?

A very important part of the hedge fund industry is Web sites and media properties that list performance records for various private hedge funds. These listing services distribute a fund's basic performance record information. Click here for more information on Posting Data on Web sites.

If one of these Web sites or media gets hold of a fund's performance record from an investor and asks a fund to confirm the record, it can be okay to do so in some situations. Not confirming an error can be even worse.

Learn which sites and media pass muster and which don't. Our firm can help in this service.

First get over the private vs. public problem and next face restrictions on a fund's communications.

The general rule is that a private hedge fund must 'tell the whole truth and nothing but the truth.' That means a fund can't embellish the good, while omitting some of the bad and ugly. Fine print won't do, everything gets equal billing.

Plus the regime for how a private hedge fund presents an advertisement is formalized and standardized. Rules are intended to help investors compare one fund's apples with another fund's oranges.

Bottom line.

A private hedge fund can get the word out (to more than the few qualified people it may know), and it can use jazzy marketing brochures. But these funds must adhere to every restriction with care. Otherwise the managers face great peril, selling unregistered securities to the public and facing rescission and more trouble. To be successful in a hedge fund business, it's hard to avoid this marketing minefield. So proceed with caution! Our firm can help you be successful and not land on a mine at the same time.

Here is how GreenTraderLaw can help you:

A message from our Doug Carpenter, CPA

Let’s face it, most investors don’t want to read through an entire offering memorandum to become familiar with a hedge fund. Investors prefer to view key information in a concise, well-organized format that is easy to understand. The Offering Memorandum must be provided to all prospective investors, but it is the informational brochure that makes your fund shine. In real estate the 3 rules of success are location… location… location. For investment managers its presentation… presentation... presentation.

Marketing Brochure Service

Green Company will construct a custom designed brochure just for your fund. All of the key information on your fund is included to your custom specifications. These can range from a simple one page summary sheet to a 60-page booklet. All of the larger brochures include graphics designed to make your fund and strategy more understandable. Most important, we ensure the material you are distributing comply with all regulations and include necessary disclaimers and disclosures.

We will also periodically update your material (recommended quarterly) to keep the information presented current.

Hedge Fund Performance Reporting Service

Exposure for your fund is very important. There are many web sites today that allow accredited investors to scan, monitor and contact the managers of the funds listed. These sites and services have proven to be an effective way for fund managers to obtain prospects. Registering with all of these web sites can be very time consuming and maintaining your fund’s performance information monthly can be an enormous chore.

There is also risk when you post your information on some web sites. SEC no-action letters have indicated that sites listing hedge fund performance and other data must maintain certain standards. Click here for more information on Posting Data on Web sites.

Green Company will remove the burden of time and risk with our reporting service. We will register your fund with the most popular compliant sites and will continually update performance data each period. One submission to us gets you listed with up to a dozen or more sites and databases. Many of our clients report they have substantially increased their business through the use of this service.

Service Provider Evaluation and Selection

Having the right business contacts and service providers is critical to the success of your business. Such decisions as selecting the appropriate Prime Broker, software vendor, disaster recovery and other service providers can be as critical to success as your investment strategy. Green Company can assist in this process. We apply the same methodology used by large name consulting firms to determine the right service providers but at a fraction of the cost.

Special Services

• Interim portfolio manager or assistant portfolio manager services
• Board of Director Services and advisement
• Research assistance
• CRM solutions
• Client, fund of fund and investment manager representation of your fund
• Portfolio metrics calculations
• Development of investment management strategies
• New fund launch from star to finish (for new funds or for existing funds looking to add a new product line).

If you are interested in any of our operation and compliance services please email us at compliance@greencompany.com or call us (speak with Robert Green, CPA to start). We look forward to working with you soon.

GreenTraderLaw Compliance Services Retainer** ** Kindly change units to the retainer amount set by your attorney or CPA. Example: For $3,000 retainer (3 units x $1,000). $1,000

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Posting Data On Web sites

Regulatory Background

The SEC’s rules and regulations related to posting your fund’s information on Web sites are summarized here. This document refers to a large number of no-action rulings that have been issued over the years by the SEC. The sum of all that data represents the SEC’s current position on these matters.

There is a concern about posting your fund’s information on these types of Web sites. By doing so, it could eliminate a fund's exemption from a public offering.

There is also concern for investment advisers. Only registered investment advisers (with the SEC or a state) may advertise to the general public. Typically, registering as an investment advisor requires that you pass a Series 65 examination and meet other requirements. Click here to learn more about registered investment advisers.

The standard definition of “holding out” is as follows:

Advisers may be holding themselves out as investment advisers if they advertise advisory services, use the label "investment adviser" on business cards or stationery, list themselves as advisers in telephone, business, or building directories, or let it be known generally by word of mouth or otherwise that they are available to accept new advisory clients.

Requirements for valid Web sites for posting your data

Generally, the SEC’s no-action letters and other guidance indicate that the following would be necessary to ensure the simple posting of information on an Internet site would not be considered “general solicitation and advertising” if the Web site:

• is run by a broker/dealer registered with the NASD (or is affiliated with such a broker/dealer);
• requires a password to gain access;
• requires that the broker/dealer have a pre-existing, substantive relationship with the prospective investor; and
• requires that the person signing up for access to the service be qualified as an accredited investor.

One of the no-action letters specifically states that the “pre-existing, substantive relationship with the prospective investor” can be accomplished via a questionnaire providing the broker/dealer with sufficient information to evaluate the offeree’s sophistication and financial situation.

Note that if the broker/dealer arranges for or facilitates a transaction between a hedge fund and an accredited investor introduced to the hedge fund by the broker/dealer, the broker dealer is responsible to qualify the prospective investor as an accredited investor, and to open an account with the investor. These stipulations were designed to allow the broker/dealer to fall under the safe harbor of not having a general solicitation when there is a “pre-existing, substantive relationship between an issuer, or its broker/dealer, and the offerees.”

Conclusion and caveat
The bottom line is that it is fine to use certain Web sites to post your data, as long as each site you use is following all of the SEC’s rules. However, pay strict attention to any sites where you think it would be of value to post your information. Compare the way they operate to the SEC’s no-action letters and other guidance. You do not want to lose your exclusion from registration as an Investment Adviser. Also, make sure you know whether you are subjecting yourself to a fee or commission payable to the broker/dealer if they bring you an investor/client. It is your responsibility to ensure that you do not lose your Investment Adviser exemption, and to know your obligations if the site matches you up with a prospective investor.