When hedge fund managers or advisers with separately managed accounts (SMAs) consider launching a mutual fund, they often ask similar questions. Can performance be ported over from a hedge fund or SMA strategy to the mutual fund for marketing purposes? What are the rules about porting or using past performance?
The answers to these questions are complex. We’ll discuss some of the issues below and if you have further questions, please reach out to us anytime.
IS IT POSSIBLE TO PORT PERFORMANCE FROM A SMA INTO A MUTUAL FUND?
The simple answer is no. However, a registered mutual fund may include in its prospectus information concerning the performance of separately managed accounts (SMA) and other funds managed by the fund’s adviser that have substantially similar investment objectives, policies, and strategies as the fund.
That information cannot be presented in a misleading manner and cannot obscure or impede the understanding of information that is required to be in the fund’s registration statement (including the fund’s own performance). A mutual fund is not allowed to use past performance from separately managed accounts with similar investment objectives, policies, and strategies as the fund in its marketing materials, other than the prospectus.
CAN I PORT PERFORMANCE FROM MY HEDGE FUND INTO A MUTUAL FUND?
Generally, porting performance is an area that requires analysis for any specific strategy or fund. Some hedge fund performance can be ported into a mutual fund if the hedge fund meets these criteria:
- The fund must have multiple investors.
- Utilize the same investment strategy; the ‘40 Act fund must generally follow the same investment strategy as the originating hedge fund.
Porting performance generally requires the original hedge fund to close and convert into a mutual fund. A manager may instead wish to start a mutual fund that mirrors his existing unregistered fund. In both cases, the manager can disclose the performance of the unregistered vehicle in the mutual fund’s prospectus if the new fund follows similar investment strategies and provided that certain other conditions are met.
In order to document past performance for a hedge fund, Gemini Fund will request the historical performance data from the hedge fund administrator, inclusive of any performance fees. Typically hedge fund administrators provide us with the monthly total returns, which we then convert into month-end net asset values (NAVs) to be uploaded into our performance tracking system. Gemini Fund then confirms the total returns to those published in the hedge fund’s annual report.
Performance tracking companies, such as Morningstar, will accept the historical performance data for the period of time the investment vehicle operated as a hedge fund for tracking purposes, however, they only look at the period of time of operation as a mutual fund for assigning a 3 year rating.
An adviser of a hedge fund planning to convert to a mutual fund should consider the limitations placed on mutual funds when using leverage or investing in commodities, among other limitations, and should coordinate the conversion very closely with an experienced administrator and outside counsel. If a strategy has to be adjusted in order to convert, it may impair the mutual fund’s ability to retain its prior hedge fund performance.