The Ontario Securities Commission has issued a report on marketing habits of hedge funds and other pooled funds and found that many of them don’t make the grade when it comes to honesty. “We have seen a number of instances where the [marketing] materials were prepared in a way that highlights or exaggerates favorable points while omitting or failing to disclose facts that may be less favorable to the” investment counsel/portfolio managers. According to the report, more than half of the advisers reviewed were “deficient in the presentation in the use of benchmarks,” and urged hedge funds and other pooled managers to walk the straight and narrow. Performance data, for example, “should be calculated using a consistent methodology so that any comparisons are not misleading.” Among some of the issues the agency uncovered in its review:

• Hypothetical performance data presented in a way that may mislead clients to believe that it is the actual performance returns of their investment fund or strategy;
• Index returns were passed off as those of the adviser’s own fund or strategy;
• Model performance data for a strategy that had no actual clients;
• Model performance data instead of the returns of actual client accounts.

The OSC went on to say there was a general lack of disclosure that any of the above was hypothetical, and where there was disclosure, it was presented in a way that was “not clear and prominent.” While hedge funds are not regulated in Canada, the OSC recommends that they follow the marketing practice of mutual funds as a way of enhancing their marketing practices, until such time the agency decides HFs need further guidance.