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Digital Subscriptions > The Hedge Fund Journal > Issue 115 - July | August 2016 > Hedge Fund Performance Advertising

Hedge Fund Performance Advertising

Recent SEC enforcements on use of performance numbers

While performance advertising has long been a focus of the Securities and Exchange Commission, some recently settled SEC enforcement matters are a cause for concern for investment advisers that utilise advertising materials containing performance information prepared by third parties.

In February 2016, the SEC charged Cantella & Co., a registered investment adviser with making misstatements to its advisory clients by utilising F-Squared Investment Inc.’s inflated AlphaSector performance track record in its own advertising materials. Between October 2012 and May 2015, Cantella offered F-Squared’s AlphaSector strategy to its clients. The SEC issued a cease and desist order against Cantella as a result of its use of F-Squared’s performance information in its advertising. AlphaSector is a sector rotation strategy based on an algorithm that yields a signal indicating whether to buy or sell certain industry ETFs that compose the industries in the S&P 500 Index. This investigation originated from an SEC administrative proceeding in December 2014 in which F-Squared admitted that its advertisements falsely claimed that the AlphaSector strategy had a performance history dating to April 2001 when, in fact, its performance history was hypothetical and derived through backtesting.

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