Tips For Investors: Rapoport on Hedge Fund Advertising

Date: Wednesday, August 28, 2013
Author: Alex Akesson, HedgeCo.net

Dian Vujovich at the Palm Beach Daily News writes about the recent changes to the Securities Act of 1933, which allows hedge funds to raise money through general solicitation and advertising to the public.

US hedge funds are, for the first time, able to solicit investors freely and advertise their funds through mass media channels, from television adverts to newspapers articles and websites.

“This is obviously a monumental development in the industry, lifting the general solicitation ban for hedge funds.” Evan Rapoport, founder of industry portal HedgeCo.net, said earlier this year in a HedgeCo exclusive. ”It’s easy to imagine a world where the largest hedge funds are purchasing spots on CNBC. The industry has operated since the days of Alfred Winslow Jones under the basis of no general advertising, but I think we are moving closer to a point where hedge funds themselves will resemble the mutual fund industry. We already see transparency mandates causing funds to report holdings, the proliferation of UCITS funds with daily liquidity, and now general solicitations move us one step closer to the inevitable.”

Dian interviewed Evan Rapoport on his views on the repealing of the SEC’s 80-year ban and what investors should be aware of when looking into possible investments. The article came out came out in hard copy in the Sunday Palm Beach Daily News’ ”Shiny Sheet.”

* Verify all of the hedge fund’s providers. That means finding out whether the fund has a quality auditor in place and is one that is registered with a Public Company Accounting Oversight Board. This private-sector non-profit organization was created by the Sarbanes-Oxley Act to oversee the auditors of publicly traded companies.

* Contact the fund’s auditor and obtain copies of current and past audits. “You want to review those audits because they’ll tell you things like how much money the fund manages, if the assets they say they have are correct. And give you affirmation on the performance (the fund) is posting,” Rapoport said. “That’s very important.”

* Become familiar with the hedge fund’s administrator and administration firm. The administrator keeps the fund’s month-to-month accounting records and produces the net asset values (account statements) for investors. Sometimes the administration firm also has to sign off on any fund-related money movement. “Money cannot be moved out of accounts, not out of the brokerage accounts, the limited partnership accounts, etc., without the administrator signing off on that money movement,” Rapoport said.

* Ask for a copy of the Due Diligence Questionnaire. In it will be background information about the fund managers, their investment strategy, how they employ that strategy and a list of the fund’s third-party providers.

“It (the questionnaire) will provide you with a wealth of information about the organization as a whole so you can get comfortable with not only the fund and the performance, but the people behind the fund and the strategy that they look to employ.” Rapoport concluded.

Alex Akesson
Editor for HedgeCo.net
alex@hedgeco.net