US law change could help small funds of funds repair image
Recent US laws liberalizing how hedge funds communicate with the wider public could be of particular help to funds of funds, a community struggling to assert its worth after performing worse than the average single fund in seven of the past eight years, according to independent US hedge fund marketer Don Steinbrugge.
Provisions in the Jobs Act, recently signed by President Barack Obama, are primarily to allow small companies to raise capital and create jobs.
Hedge funds are also beneficiaries, however, as the Act also requires the US regulator to form laws to eliminate the veto on ‘general solicitation and advertising’ by them within 90 days.
Steinbrugge (pictured), managing member of Agecroft Partners, says this could specifically help smaller multi-manager products.
“Over the past three years, most net flows have gone to hedge fund organizations with the strongest brands, not necessarily the highest quality funds [and] this is especially true for the hedge fund of funds industry, where many small and mid-sized funds have had a difficult time raising assets.
“For many high net worth individuals looking to diversify into hedge funds, a hedge fund of funds may be a more appropriate alternative, due to the diversification benefits of investing in multiple managers. We expect the hedge fund of funds industry to be a major beneficiary of this new legislation.”
Steinbrugge says the rules could generally help small- and mid-size funds ‘catch up’ their larger and better-known rivals.
“Organizations bold enough to be the first to advertise will have a large advantage in building their brand through not only the advertisements, but also the publicity generated from these ads.”
But he adds the Jobs Act has significant negative aspects, too.
These include rivals getting greater insight into performance; “unscrupulous marketing activity by shady managers who may be able to take advantage of high net worth individuals with a lower level of investment knowledge”; and the possibility retail buyers will be persuaded to invest “based solely on high historical returns [which are] often not from the highest quality managers”.
But Steinbrugge notes the Jobs Act helps clear up a significant anomaly for those hedge fund managers registered with the SEC.
While one law disallowed them from communicating with the media, participating in databases and having contact details online, their SEC registration forced them to send to authorities “detailed information about their organization, available to the general public on the SEC website.
“The new legislation should help bring clarity and a more level playing field to marketing strategies among hedge funds,” Steinbrugge says.