Hedge fund advertising could hurt industry as much as it helps, practitioners warn
Hedge fund practitioners expect managers to use forthcoming US law changes allowing them to communicate more freely, but caution the effects of this on the $2trn industry and its investors will not be uniformly positive.
On the positive side, they say the permission of funds to advertise broadly will unveil a previously less visible industry to a broader audience.
Just as significantly the rule change, which the Securities & Exchange Commission is working on over the coming 90 days, will clear up historic confusion about exactly how much managers can communicate with the press, they say.
But a negative effect could be “unscrupulous marketing activity by shady hedge fund mangers who may be able to take advantage of high net worth individuals with a lower level of investment knowledge.”
Don Steinbrugge (pictured), managing member at placement agents Agecroft Partners LLC, says: “Unfortunately, some retail investors may be persuaded to invest in a fund based solely on high historical returns. The highest returning managers often are not the highest quality managers [as] their historical performance might have been based on a very small asset base; taking significant risk; or even luck.
“If these investors end up having an experience significantly below their expectations, it could create negative publicity for the hedge fund industry.”
The forthcoming freedom for managers to speak openly about what they do appears as part of the US JOBS Act, which has now been passed by Congress and signed by President Obama.
Its main goal is to make is easier for small companies to raise capital and create jobs, and an indirect beneficiary has been the $2trn hedge fund industry.
Previously most managers were largely discrete and spoke little, if at all, to people beyond a circle of their clients, because laws (Regulation D of the Securities Act of 1933) banned general solicitation and advertising, even putting contact details on corporate websites.
Steinbrugge says the Act revoking this will “revolutionize how alternative investment managers can market their funds to the public”.
Over the coming three months the SEC will develop new regulations for the industry.
While noting funds will still only be allowed to accept cash from ‘accredited investors’, Steinbrugge says: “We may soon see newspaper, magazine and television advertisements from hedge fund organizations”.
One significant advantage of the Act is its providing greater clarity about how information can be provided to the public, and what type of information hedge fund managers are allowed to disseminate.
US managers have previously been discrete, due to the ban, but those registered with the SEC under the Investment Advisors Act of 1940 have had to make public various details about their businesses and products
“This makes it impossible to be in compliance with both legislations simultaneously,” Steinbrugge says.
Against this backdrop, some funds have spoken with the media about the industry generally, participate in databases published in the media, and provide limited website information about themselves and their process.
European managers have generally been more chatty than their US rivals.
“The new legislation should help bring clarity and a more level playing field to marketing strategies among hedge funds,” Steinbrugge says.
He adds the JOBS Act will also help funds reach a wider audience, particularly wealthy individuals who might have found it difficult to find them, and in particular “high quality small and mid-sized hedge funds”.