Articles Posted in

Published on:

Written by guest contributor, Bruce Frumerman, Frumerman & Nemeth Inc.

This article first appeared in FINAlternatives on January 30, 2012 and is re-printed with permission below.

It’s one thing when people who are not part of the hedge fund investor universe say hedge funds are money management firms that reveal too little about themselves. It’s another thing entirely when those folks investing in hedge funds are complaining about this.

In January SEI released part one of its results from its fifth annual survey of institutional hedge fund investors, conducted in collaboration with Greenwich Associates, The Shifting Hedge Fund Landscape. Three of the recommendations the report offers hedge fund firm owners give a glimpse into where surveyed investors are asking hedge funds to “provide more windows into investment processes and decision-making,” as SEI put it.

SEI says hedge funds need to:

  • Go The Extra Mile To Make Strategies Understandable.

Thoroughly explain the strategies and processes [you] are using to generate returns.

  • Keep Articulating And Reinforcing The Value Proposition.

Demonstrate exactly how [your] strategy and methods are enhancing [your] clients’ risk-adjusted portfolio returns.

  • Clarify Performance Expectations.

Work to help clients understand the tradeoffs between risk and reward, and how [your strategy] can be expected to perform under varying market conditions.

All of this points to a specific failing: most hedge funds are not communicating enough detail about how they think and how they invest. It’s not enough for a hedge fund manager to know this in his head. Further, it’s not enough for a hedge fund sales person to believe she is able to recite all this required information in a verbal presentation at a pitch meeting with a prospect. Institutional investors need to have this in writing. After all, they’ll be referring to a hedge fund’s marketing collateral when, months after a hedge fund has made its in-person presentation, the institution’s investment committee finally gets around to discussing the hedge fund firm and its strategy.

As SEI’s survey makes clear, hedge funds are not building out their storyline content enough to fully explain how they invest, differentiate themselves from competitors and communicate appropriate performance expectations. I’ve identified a reason why this is too often so: taking the wrong starting point. Many hedge fund firm owners go about their internal process of creating their storylines about how they invest by trying to think in bullet points, because that’s what goes into a flip chart pitchbook. That is the wrong starting point and the wrong point of reference. Think this way and you will end up leaving out too much detail about what you do that prospective investors want you to be communicating. Market this way and you may leave some prospects thinking your firm lacks transparency and others that your firm lacks the competence to pull of what you claim you aim to do.

Savvy hedge fund firms recognize that a flip chart pitchbook is a marketing tool, not the only marketing tool. They know that they have to deliver marketing collateral into the hands of institutional investor prospects who may take months before to looking at those documents again when discussing the hedge fund and its strategy in an investment committee meeting.

A flip chart pitchbook is not a leave-behind piece whose copy retells on paper the detail of what a fund manager presents verbally at a pitch meeting regarding the full story of his fund and its investment process. The people you pitch have learned from experience that bullet points in the typical flip chart pitch book rarely tell the full story. In a meeting, the portfolio manager or salesperson usually “fills in the blanks”, adding more information as they elaborate about their firm and its investment process. If you assume all of your prospects are attentive enough to absorb and recall this non-documented content months later, when investment allocation decisions might be made, you are mistaken.

So, how can you do a more effective job of thoroughly explaining your fund’s strategy and process in writing?

Here’s a recommendation for giving your firm a fresh start in this new year: begin by putting onto paper a clean, rethought long version storyline that explains your investment beliefs and details the process you follow to implement your strategy. Once you’ve written this out in sentence and paragraph format reread what you wrote, and try to do so with the critical eye of a skeptical prospect, because you need to construct a storyline to sell with that is buyer-focused, not seller-focused.

Your words need to be cogent and compelling. Keep in mind that people will not be able to follow you if your explanation about how you invests jumps around, so see to it that you build and tell a linear story.

With your new, long version storyline copy in hand you’ll have the baseline content that can be applied to a range of marketing tools. This content can serve as the meat of an in-person verbal presentation. Highlights of the long version storyline can be excised to be added to the data presented in a flip chart pitchbook, and to a fact sheet/backgrounder piece. Importantly, the full content belongs in a document of its own: an “evergreen” brochure that just addresses investment process. This evergreen document should retell in print what you communicate verbally at a pitch meeting for educating and persuading people to understand and buy into how you invest.

How useful is adding a brochure format marketing piece as a selling tool to provide, as SEI puts it, “more windows into investment processes and decision-making”?

Here’s a recent case example from a hedge fund client of my communications and sales marketing consulting firm. Having presented his pitch to a university endowment officer, the fund manager was complimented on his evergreen brochure leave-behind because, as the prospect noted, it fully retold the fund’s investment process that was given in the verbal pitch. That endowment officer added that nine out of ten times he only gets a flip chart pitchbook from those who pitch him, so he often lacks the investment process detail he needs, in an easily accessible marketing piece, for his due diligence. Another endowment team the hedge fund manager met with echoed that feedback. After telling the hedge fund manager they liked how his investment process was clearly spelled out in his 12-page, brochure-format leave-behind, they complained to him about getting too many 50-page pitchbooks from other money management firms.

So, if you want to be in a better position to attract new investors this year, look into how you could do a better job of articulating and reinforcing your value proposition; both with the story you tell and the range of marketing collateral in which you deliver it. Make it easier for your institutional prospects to remember and recount to fellow investment committee members how your firm invests and you will have created a competitive edge in your marketing.


#          #          #

© 2012 Frumerman & Nemeth Inc.

Bruce Frumerman is CEO of Frumerman & Nemeth Inc., a communications and sales marketing consultancy that helps financial services firms create brand identities for their organizations and develop and implement effective new marketing strategies and programs. His firm’s work has helped money management clients attract over $7 billion in new assets, yet Frumerman & Nemeth is not a Third Party Marketing firm. Bruce has over 30 years of experience in helping money managers to develop buyer-focused positioning strategies to differentiate them from their competitors; create more cogent and compelling sales presentations and marketing materials to better tell their story; and use media relations marketing and industry conference speaking opportunities to help establish a branded identity for their organization by generating third-party endorsement for the expertise of their people, the value of their services and the quality of their products. He has authored many articles on the topic of marketing money management services and is a frequent speaker on the subject at industry conferences. He can be reached at, or by visiting

Published on:

Written by Jay Gould and Peter Chess

In re-proposed custody rules, the California Department of Corporations (“DOC”) has reflected the most important aspects of the comment letter that Pillsbury provided on July 27, 2011, such that all transactions and short positions need not be disclosed in the quarterly account statements.  In general, the re-proposed custody rules define “custody,” and subject to certain limited exceptions, require that advisers with custody maintain the assets with a qualified custodian.  The re-proposed custody rules also specify details with regard to audits and require compliance by advisers with specific safeguards.   

The DOC also released proposed regulations that contain a successor to the private fund exemption, which are currently in the comment period.  Under the DOC’s proposed private adviser exemption, advisers would be eligible provided they: (i) have not violated securities laws; (ii) file periodic reports with the DOC; (iii) pay the existing investment adviser registration and renewal fees; and (iv) comply with additional safeguards when advising 3(c)(1) funds.  Additionally, under the proposed regulations, the exemption defines a private fund adviser as an investment adviser that provides advice only to qualifying private funds, which include 3(c)(1) and 3(c)(7) funds.  A grandfathering provision for private advisers is also included. 

The Massachusetts Securities Division released amendments similar to the DOC’s on January 18, 2012.  These amendments contain regulations that relate to the private fund exemption and custody requirements, among others.  The amendments, released after consideration of industry comments, make substantive changes to the definition of “institutional buyer,” re-propose a broadened private fund exemption that includes the introduction of a grandfathering provision, and propose requirements for advisers with discretion over, or custody of, client funds. 

The purpose of the Massachusetts amendments is to coordinate with the new rule adopted by the Securities and Exchange Commission under the Dodd-Frank Act.  Also included in the amendments is an exemption from state registration for advisers that provide advice solely to private funds that qualify as 3(c)(1) or 3(c)(7) funds.

Published on:

Written by Jay Gould, Ildiko Duckor and Peter Chess

The Commodity Futures Trading Commission (CFTC) released a Final Rule on January 11, 2012, on the Registration of Swaps Dealers (SDs) and Major Swap Participants (MSPs).  The Final Rule establishes the process for the registration of SDs and MSPs and now requires SDs and MSPs to become and remain members of a registered futures association.  Included in the CFTC rulemaking is a definition of an “associated person” of an SD or MSP and an implementation of a prohibition on an SD or MSP permitting an associated person who is statutorily disqualified from registration from effecting or being involved in effecting swaps of behalf of the SD or MSP.

In a companion Notice and Order by the CFTC on the same day, the National Futures Association (NFA) was authorized to perform registration functions under the new rulemaking.  Specifically, the NFA is authorized to perform the following registration functions: 

  • To process and grant applications for registration and withdrawals from registration of SDs and MSPs, and to notify of provisional registration; 
  • In connection with processing and granting applications for registration of SDs and MSPs, to confirm initial compliance with such other related CFTC regulations that may be adopted;  
  • To conduct proceedings to deny, condition, suspend, restrict or revoke the registration of any SD or MSP or any applicant for registration in either category; and 
  • To maintain records regarding SDs and MSPs, and to serve as the official custodian of those CFTC records.

The Final Rule and the Notice and Order released on January 11, 2012, are just a portion of a comprehensive new regulatory framework for swaps and security-based swaps under the Dodd-Frank Act.  The goal of the legislation is to reduce risk, increase transparency, and promote market integrity within the financial system. 

The Dodd-Frank Act further directs the CFTC, under Section 4s of the Commodity Exchange Act, to provide for the regulation of SDs and MSPs with respect to, among others, the following areas: capital and margin, reporting and recordkeeping, daily trading records, business conduct standards, documentation standards, duties, designation of chief compliance officer, and, with respect to uncleared swaps, segregation.

Pillsbury will continue to monitor the CFTC’s rulemaking and will provide further information as it becomes available.

Published on:

Written by Jay Gould and Peter Chess

Managed Funds Association (“MFA”) submitted a comment letter (the “Letter”) to the Securities and Exchange Commission (“SEC”) on January 6, 2012 with a rulemaking petition requesting the SEC to amend Rule 502(c) of Regulation D under the Securities Act of 1933.  The Letter urges the SEC to exempt private funds from the ban on general solicitation and advertising under Regulation D.

Under the existing framework, hedge funds generally must avoid engaging in any “general solicitation” or “general advertising” in connection with offers and sales of their securities.  MFA believes that changes in the securities markets and regulations have rendered the restrictions of Regulation D, enacted 30 years ago, unnecessary and increasingly unclear in practice.  The Letter’s suggested changes would enhance the regulation of private fund offerings, promote investment, and enhance economic growth by:

  • Reducing the legal uncertainty resulting from the current regulation of private fund offerings conducted in reliance on Regulation D;
  • Increasing transparency of the hedge fund industry in a manner consistent with the Dodd-Frank Wall Street Reform and Consumer Protection Act and recent regulatory initiatives;
  • Facilitating capital formation and reducing administrative costs by allowing investors to more easily obtain information about private funds;
  • Maintaining strong investor protections and ensuring that only sophisticated investors are able to purchase interests in private funds; and
  • Reducing regulatory oversight costs and allowing the SEC staff to reallocate resources to other aspects of investor protection, including products offered and sold to retail investors.

If the MFA proposals were adopted, private funds would be able to engage in public communications and offering activity while remaining in compliance with Regulation D and the Investment Company Act of 1940.  It would also allow a wider audience to learn about the hedge fund industry, and help combat inaccurate information and misperceptions of the industry.  These misperceptions include the view of the industry as secretive, which creates an unwarranted negative inference by investors and regulators.

Published on:

Written by Jay Gould, Ildiko Duckor and Peter Chess

On January 4, 2012, the Securities and Exchange Commission (SEC) released a National Examination Risk Alert addressing investment adviser use of social media.  Investment advisers should have policies regarding the use of social media, and the SEC outlined specific factors that need to be addressed by these policies.  The SEC’s guidance could be particularly important given the “crowdfunding” legislation Congress is currently considering.

The January 4, 2012 National Examination Risk Alert (January Alert) states that investment advisers’ use of social media must comply with various provisions of the federal securities laws, including the antifraud provisions, the compliance provisions, and the recordkeeping provisions.  The January Alert stresses that particular attention with regard to the use of social media must be paid to third party content (if permitted) and the recordkeeping responsibilities. 

The January Alert provides staff observations of factors that an investment adviser may want to consider when evaluating a compliance policy for the use of social media.  These include, but are not limited to:

  • Usage Guidelines.  Investment advisers may provide guidance in their policies on the appropriate and inappropriate use of social media;
  • Monitoring.  Investment advisers may consider how to effectively monitor their social media sites or any use of third-party sites;
  • Content Standards.  May include clear guidelines and the prohibition of specific content or other content restrictions; and
  • Information Security.  Investment advisers may consider any information security risks posed by access to social media sites.  These could include dangers from hacking and other breaches of information security. 

Additionally, investment advisers that allow for third-party posting on their social media sites should consider having policies and procedures in place to address this.  Reasonable safeguards should be in place to avoid any violation of the federal securities laws.  Potential violations could result from the appearance of testimonials on a firm’s social media.  For example, the SEC staff believes that the use of social plug-ins such as the “like” button could be considered a testimonial under the Investment Advisers Act of 1940.

Finally, the January Alert notes that investment advisers should consider reviewing their document retention policies so that the retaining of any required records generated by social media use complies with the federal securities laws.  This review could include addressing factors such as: determining what types of social media use create a required record; maintaining applicable communications in electronic or paper format; creating training programs to educate advisory personnel about recordkeeping; and, using third parties in order to keep proper records.

The Financial Industry Regulatory Authority (FINRA) has echoed the January Alert in recent releases, such as Regulatory Notice 11-39 from August 2011.  This Notice provided guidance on social media websites for broker-dealers, and addressed recordkeeping and third-party sites, among other topics.  This Notice supplemented an earlier FINRA notice from January 2010 that provided guidance with regard to blogs and social networking websites. 

The SEC has also recently increased its focus on internet-related enforcement actions.  On January 4, 2012, the SEC charged an Illinois-based adviser with perpetrating a social media scam.  The alleged scam involved offering fictitious securities that were promoted by using LinkedIn.  This follows multiple enforcement actions from February 2011 for internet-related schemes, including boiler rooms and spam-email touted pump and dumps.


Crowdfunding is a method of capital formation where groups of people pool money, typically by use of very small individual contributions, in order to support the organizers that seek to accomplish a specific goal.

Congress has also been active in the realm of internet-related securities issues with its involvement in crowdfunding.  The House of Representative passed the Entrepreneur Access to Capital Act (H.R. 2930) on November 3, 2011.  H.R. 2930 provides for registration exemptions for certain crowdfunded securities if the aggregate amount raised through the issuance is $1 million or less each year and each individual who invests in the securities does not invest, in any year, more than the lesser of $10,000 or 10 percent of the investor’s annual income.  Businesses could raise up to $2 million each year under the exemption if investors were provided with certain financial information.

The Senate currently is considering its own version of a crowdfunding bill, the Democratizing Access to Capital Act of 2011 (S. 1791).  S. 1791 provides for registration exemptions for certain crowdfunded securities if the aggregate amount raised through the issuance is $1 million or less each year and each individual who invests in the security does not invest more than $1,000.  The Senate Committee on Banking, Housing and Urban Affairs held hearings on December 1 and 14, 2011, regarding this legislation, but a vote on the bill has not yet occurred.

Reaction to the crowdfunding legislation has been mixed.  Supporters, such as Tim Johnson, the Chairman of the Senate Committee on Banking, Housing and Urban Affairs, feel that the legislation will provide easier access to capital for smaller businesses and startups, which will grow business and create new jobs.  Detractors, such as Professor John C. Coffee, Jr., in his testimony before the Committee, argue that S. 1791 could well be titled “The Boiler Room Legalization Act of 2011.”

The crowdfunding legislation and its developments promise to bring more scrutiny to the interplay of the federal securities laws and the internet.  Investment advisers, and other financial firms, should examine and ensure related policies and procedures are up to par.

Published on:

Written by Peter J. Chess

Many fund managers are required to submit reports every month and/or every five years to the Federal Reserve Bank of New York (“FRBNY”).  The Department of the Treasury’s Treasury International Capital (“TIC”) data reporting system has two such upcoming reporting deadlines.    


The Aggregate Holdings of Long-Term Securities by U.S. and Foreign Residents (“TIC Form SLT”) is required to be submitted by entities with consolidated reportable holdings and issuances (positions) with a fair market value of at least $1 billion as of the last day of any month.  These entities may include funds and their investment advisers, and U.S. companies.  The purpose of the TIC Form SLT is to gather information from U.S. resident entities on foreign persons’ holdings of long-term U.S. securities and on U.S. persons’ holdings of long-term foreign securities. 

If required to do so, fund managers and other entities must submit the report to the FRBNY by the 23rd day of each month with regard to the data of the previous month.  The upcoming TIC Form SLT will contain consolidated data as of December 31, 2011 and must be submitted by January 23, 2012. 


The Report of U.S. Ownership of Foreign Securities, Including Selected Money Market Instruments (“TIC Form SHC”) is a mandatory survey of the ownership of foreign securities, including selected money market instruments, by U.S. residents as of December 31, 2011.  The TIC Form SHC is a benchmark survey of all significant U.S. resident custodians and end-investors held every five years. Custodians are all organizations that hold securities in safekeeping for other organizations.  End-investors are organizations that invest in foreign securities for their own portfolios or invest on behalf of others, such as investment managers/fund sponsors.

The TIC Form SHC is divided into three schedules: Schedule 1, Schedule 2, and Schedule 3.  Schedule 1 must be filed by all entities that are notified by the FRBNY that they are required to file the TIC Form SHC, and by all U.S. resident custodians or end-investors that exceed the reporting thresholds of Schedules 2 and 3.  Schedules 2 and 3 must be filed by entities that exceed the reporting threshold of $100 million for the respective specified safekeeping arrangements of foreign securities.

The data for the TIC Form SHC is as of December 31, 2011, and must be submitted by fund managers and other entities required to do so to the FRBNY no later than March 2, 2012.