Fund sponsors have to be sure to invest as they've promised or face litigation, said industry insiders. "If you don't invest the way you say you will, you are opening yourself up for liability, especially if there are losses," said Benjamin Bornstein, president of Prospero Capital Management of Columbus, Ohio, which runs three SEC-registered funds, two of which by design, employ hedging strategies. While the exact portfolio movements done under cover of traditional hedge funds can be elusive, by their very structure SEC-registered hedge funds are almost as transparent as traditional mutual funds, Bornstein said. "It would be pretty obvious if the fund was not being run the way it was supposed to have been," he added. Fund sponsors, investment advisors and a fund's board of directors are responsible for reviewing performance as it compares to other assets the same investment firm manages, and should be asking why where disparity exists, said one fund attorney.
As to disparities between prospectuses and marketing materials, most initial registration statements leave some wiggle room for small investment shifts, said Steven Toll, head of the securities practice group at Cohen, Millstein, Hausfield & Toll of Washington.