What Is a Hedge Clause?

What Is a Hedge Clause?

Let me explain what a hedge clause is. It's something you see in research reports, designed to shield the writer from any blame if the information turns out inaccurate. This clause basically says the author isn't responsible for errors, omissions, or oversights in the document. You'll find these in analyst reports, company press releases, and most investing websites.

Think of examples like a standard disclaimer or a safe harbor notice—they're all hedge clauses in action.

Key Takeaways

Here's what you need to grasp: A hedge clause is text added to industry research or analysts' reports that acts as a disclaimer. It frees the author from responsibility if there are errors or things left out. Remember, these clauses have to be phrased just right to stay within regulatory boundaries on securities fraud and false statements.

Understanding Hedge Clauses

Hedge clauses protect people who share information but aren't involved in preparing or recording a company's financial data. Even though they're often skipped over, I advise you to read them carefully—it helps you judge the material better. You'll spot hedge clauses in almost every financial report out there today, and they're crucial for you to understand, no matter how easy they are to ignore.

For instance, the 'safe harbor' provision in most company press releases is a classic example. Also, if there's a potential conflict—like a stock analyst recommending their own holdings—that has to be disclosed in the hedge clause for that report.

Typical Hedge Clause Structure

In an investment advisory contract or a hedge fund agreement, a typical hedge clause is set up to excuse the adviser from liability or provide indemnification by the client, unless there's gross negligence, reckless or willful misconduct, illegal acts, or actions outside their authority.

These clauses often come with a 'non-waiver disclosure' that tells you the client might still have legal rights under federal and state securities laws, even with the hedge clause in place—those rights aren't waived.

Securities and Exchange Commission Position on Hedge Clauses

The U.S. Securities and Exchange Commission (SEC) points out that Sections 206(1) and 206(2) of the Advisers Act make it illegal for investment advisers to use any scheme to defraud or engage in practices that deceive clients or prospects.

These antifraud rules can be broken by hedge clauses or exculpatory provisions in agreements if they make clients think they've given up rights that can't be waived.

The SEC has stated that hedge clauses limiting liability to gross negligence or willful malfeasance can mislead unsophisticated clients into believing they've waived non-waivable rights, even if the clause says federal or state law rights remain intact.