Can a hedge fund manager promise to protect investors' capital?
Advanced · Video 15 of 16 · 0:36 ·
Only if it's really true, which for a hedge fund it rarely is. Anti-fraud rules apply to every adviser to a pooled fund, registered or not, and bar misleading statements to investors. A genuine goal described as a goal is fine; words like guaranteed, safe or can't lose invite trouble. Even a real backstop, such as the manager covering first losses, has to be written into the documents and be something the manager can pay. The offering memorandum describes the risks.
Everything here is for educational purposes only and is not legal, tax or investment advice, or an offer to buy or sell any security. Laws and thresholds change and depend on your facts, so talk to a qualified attorney before acting.
Key facts
- Rule 206(4)-8 bars misleading statements by any adviser to a pooled investment vehicle.
- Anti-fraud rules apply to registered and exempt advisers alike.
- Avoid guaranteed, safe or can't-lose language unless it's literally true.
- Any real loss backstop must be in the documents and be payable.
- The offering memorandum describes the risks.
Transcript
Founder: Can I tell investors their money is protected?
Operator: Only if it really is. In a hedge fund, it almost never is.
Operator: Anti-fraud rules cover every adviser to a fund, registered or not. Misleading investors is off limits.
Founder: What if I say I aim to protect capital?
Operator: A true goal, clearly a goal, is fine. Words like guaranteed, safe, or can't lose are where trouble starts.
Operator: Even a real backstop, like you covering the first losses, has to be in the documents. And you have to be able to pay it.
Founder: So I describe the risks.
Operator: All of them. That's what the offering memorandum is for.
Founder: So can I tell investors...