Unrepresentative Returns: SEC Sanctions Hedge Fund Manager For Misleading Marketing Practices

On June 14, 2024, the SEC announced an enforcement action settlement with a Pennsylvania-based hedge fund manager for violating the Marketing Rule under the Investment Advisers Act. The SEC found that the adviser had misled investors by advertising a hedge fund's investment performance based on the investment performance of a single investor in the fund. While it is not an uncommon market practice to calculate a hedge fund's since-inception investment returns by simply using the investment performance of a representative "Day 1" investor, the SEC's primary complaint was that this particular "Day 1" investor was not in fact representative. Consequently, the investment performance listed in the advertisements "differed substantially from, and was significantly higher than, the fund's overall performance and the returns achieved by other investors in the fund." These differences in performance primarily stemmed from investment restrictions in the fund related to FINRA