Pitchbook Law

Your hedge fund ‘deck’ must be balanced as well as compelling

To attract capital, marketing specialists tell hedge fund managers they need to show prospective investors how their investment strategies will enhance risk-adjusted returns (the so-called “value proposition”), perform effectively under all market conditions (the risk management requirement) and, most importantly, outperform their competition (the “edge”).

Typically, managers rely on pitchbooks to introduce their funds to investors, so they must be able to articulate, in just 20-30 slides, how they can make and save more money for their clients than their rivals.

The quality of your marketing pitch will ultimately determine whether you win or lose investors, but it’s still only one side of the story.

Equally important in a pitchbook is the fairness and balance of the overall presentation, which is, as you would expect, regulated by both the SEC and FINRA. If you include a target return in your pitchbook, for example, the SEC requires that you also disclose the sound basis upon which you arrived at that figure. If, as a risk control, you mention a particular portfolio limitation, you must also clarify whether that limitation is merely an intention (which could be upset by market developments) or a hard restriction on your fund.

As a general matter, every statement in your pitchbook must be accurate and consistent with the disclosures in your Form ADV, your offering memorandum and any other marketing materials you may be using. You must also make certain that any claim you make for your investment strategy or your fund is demonstrable.

If your fund is being marketed only by your own staff, you should at least identify in your pitchbook the countervailing risk(s) associated with every positive claim you make. On the other hand, if you engage third-party marketers to raise capital for your fund, your pitchbook must in addition include the specific risk factors enumerated in the NASD’s 2003 enforcement action against Altegris Investments and it cannot include performance results derived from backtesting. Also, if you’re marketing a 3(c)(1) fund through third-party marketers, your pitchbook can only present the actual investment returns of the fund being offered.

Since pitchbooks are generally designed for one-on-one presentations to sophisticated investors, they are not considered ‘advertising’ by the SEC. As a result, hedge fund managers may actually present their returns gross of fees in their pitchbooks, so long as they also include an example of the compounded effect of a hypothetical advisory fee on the gross results. If your track record has been imported – even in part – from a prior employment, however, you will have to meet additional, stringent conditions in order to use it at all (see Taking Your Track Record with You).

When all is said and done, your pitchbook is not only a marketing tool but an insurance policy, and it should therefore do just as good a job at presenting a balanced picture of your investment product as in promoting your competitive edge.

  • Ed Myers

    Aside from these legal requirements, managers should be sensitive to the “living qualities” of the pitch book. For one, there is the probability that, although perhaps intended for an audience of one, the pitch book should stand alone to any pass-through audiences. In other words, one should write/illustrate the pitch book so that it travels well. It should be able to convey the story to others, without vocal accompaniment or other physical “presence”. Too often, managers over-rely on charts and graphs to the point that subtler messages are lost or diminished. This may seem like common sense, but from what I’ve see over the years, there is no common sense.

  • Susan Weiner, CFA

    Thank you for detailed suggestions.

    Have you considered a Twitter account to share your information more broadly? I see you’re on Facebook.