SEC Sues “Absolute Return” Manager for Volatile, Undisclosed Trading Strategies
The SEC has filed an enforcement action against a hedge fund sponsor for trading in volatile unhedged options contrary to the PPM. In marketing presentations, the firm’s principal recommended “absolute return” strategies, including investments in its Hedged Equity Fund, for conservative investors. The PPM for the fund claimed to “provide investors with participation in equity markets with reduced exposure to the markets overall volatility.” As alleged by the SEC, the portfolio manager engaged in unhedged trading strategies that resulted in volatility that substantially exceeded market volatility. Clients ultimately lost their investments as a result of bad investment decisions in certain options.
OUR TAKE: Terms like “absolute return” and “low correlation” mean different things to different people. When fund sponsors describe their investment programs to unsophisticated investors, they should ensure that they accurately and completely describe their investment strategy.