Hedge funds are increasingly focused on establishing their presence on the Internet and via social media. This is in stark contrast to several years ago, when many hedge funds did not maintain a website at all, or only very limited websites. Although still limited in certain circumstances, today many hedge funds maintain websites with content that is frequently updated whether it be for investors only (through secured access) or more open content for prospects, such as general market commentary. Echoing this point a recent study outlined that 91% of the 100 largest hedge funds now maintain websites. Similarly, the study also found that hedge funds are increasingly active on social media via popular avenues such LinkedIn and Twitter.
The Compliance Implications of Increased Hedge Fund Social Media
Fueling the hedge fund interest in social media has been the increased relaxing of hedge fund marketing restrictions via the passage of regulations such as the US JOBS Act. With the removal of many social media regulatory roadblocks, hedge funds have continued to broaden their outreach to investors via the web and social media to reach investors. Many activist hedge funds have also utilized social media to increasingly promote their opinions on certain investments as well. Furthermore, some funds have sought to minimize any potentially negative items news and social media through more pro-active approaches to managing their digital reputations.
Among regulators, the US SEC in particular has focused on the activity of investment advisers on social media. Dating back several years the early efforts of the SEC in this areas were apparent. For example, in January 2012 the SEC issued a National Examination Alert on the use of social media. At the same time, in January 2012 the SEC charged a Illinois based adviser in a social media scam. The SEC has also issued investor alerts regarding avoiding fraud relating to funds use of social media.
In addition to offering hedge funds the benefits of being able to further their outreach to prospective investors, the SEC has also acknowledged the potential due diligence benefits associated with hedge fund social media. In an Investment Management Guidance Update from March 2014 the Division of Investment Management of the SEC stated, “We recognize that social media has facilitated consumers’ ability to research and conduct their own due diligence on current or prospective service providers.“
Organizations such as the Financial Industry Regulatory Authority (FINRA) have also adapted their regulatory approach to focus on social media. In 2013 for example, FINRA outlined so-called spot-check rules to promote regulatory oversight, and ostensible transparency, of hedge fund advertising and activities on the web and social media including blogs. Now in 2015, the SEC is catching up, proposing rules which would require fund managers to go so far as disclose a list of their social media accounts on their Form ADV filings.
Outside of the US, the UK Financial Conduct Authority (FCA) published guidelines in March 2015 on fund manager use of social media. In a press release announcing the new guidance, Tracey McDermott, FCA Director of Supervision and Authorizations commented:
“Social media is already an important tool for industry to engage with customers and its use is only likely to grow. Financial promotions, whether on social media or traditional media, must give customers the right information and meet our requirements to be fair, clear and not misleading. We have had extensive industry feedback during our consultation. We believe this guidance reflects a sensible approach that allows the industry to innovate using new forms of media and at the same time ensures customers get the right level of protection.”
Are Investors Analyzing The Risks of Increased Hedge Fund Social Media During Investigative Due Diligence?
With global enhanced compliance scrutiny of hedge fund activities on the web and for social media in particular, it is worth considering whether investors are appropriately incorporating reviews of social media into their overall due diligence process. Unfortunately, many investigative due diligence reviews tend to ignore, or minimize, social media searches during the background investigation process.
Often times a review of any social media accounts associated with either the fund management company or any key fund personnel may provide useful investigative due diligence insights. For example, a hedge fund Chief Operating Officer’s (COO) LinkedIn profile may reveal certain biographical details that are not fully fleshed out in an, “official” biography provided by the firm.
Continuing our example, as an investor seeking to make an informed investment decision, it would be considered prudent to understand the chronological details of a COO’s educational and professional history. Such information can for example help to determine extended gaps in employment or provide guidance into other positions held that the COO may wish to omit for any number of reasons. When such gaps or omissions are present an investor may be able to turn to social media to gather additional data points in this area. Similarly, analyzing social media feeds such as Twitter and blogs may also provide valuable investigative data in understanding potential reputational risks associated with a hedge fund or key personnel.
When you combine the investigative due diligence benefits of analyzing social media during the due diligence process, with the potential enhanced compliance disclosures and associated risks now surrounding a hedge funds potential use of social media, it builds an increasingly strong argument that pro-actively analyzing social media is prudent.
Corgentum works with investors to analyze hedge fund social media as part of our investigative and operational due diligence review process. Contact us today to learn more about how we may be able to enhance your current due diligence process by incorporating deep-dive reviews of evolving operational risk areas such as social media.