Marketing Hedge Funds

(sticky money describes investments that tend to stay with the manager
longer and despite poor performance).
Large investors may demand more favorable terms. Despite fee sched-
ules listed in a private placement memorandum, investors that can place
large investments with a particular hedge fund may be able to negotiate
lower fees, shorter lockup periods, or other improved terms. Some large in-
vestors have been able to negotiate a waiver of all management fees and in-
centive fees of 10 percent. Many large investors demand complete
transparency. Some investors receive daily detailed position information
and can perform daily risk analysis of positions both within the hedge fund
and aggregating the hedge fund positions with other assets in the larger
portfolio.
Effective Marketing Presentations
The marketing presentation should be clear, but it need not be simple. Hedge
fund investors are some of the most sophisticated investors and expect to see
thoughtful, analytically sound analysis of the proposed investment.
Marketing presentations are much more effective if they include past
performance. For many hedge funds, little past performance exists. Funds
can use performance from previous employers if the hedge fund manager
was responsible for the performance at the earlier entity and the hedge
fund investments are similar to the earlier investments. Past performance is
more convincing if it is audited. A hedge fund should seek permission to
use past performance from another entity in its marketing material.
QUESTIONS AND PROBLEMS
12.1 The head trader of a XYZ Hedge Fund speaks at a conference and
describes the investment characteristics of convertible bond hedge
funds without disclosing that XYZ Hedge Fund is a prominent con-
vertible bond hedge fund. After the speech, someone from the audi-
ence approaches the speaker and ultimately makes an investment in
XYZ Hedge Fund. Has XYZ violated U.S. securities laws prohibit-
ing general solicitation?
12.2 Suppose in question 12.1 the speaker is the director of marketing
who gets paid based on the amount of new money raised for the
fund and the hedge fund is registered as a broker-dealer. Has XYZ
violated U.S. securities laws prohibiting general solicitation?
12.3 Suppose in question 12.1 the speaker is a third-party marketer who
uses XYZ performance to demonstrate the desirability of the con-
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