Veritas – Why not staying schtum is in hedge funds’ own interests

The Jobs Act in the US is set to allow hedge funds to advertise publicly. Even if the new law does not lead to many advertisements actually being placed, it is a welcome remedy to some of the confusion in the historically ‘discreet’ industry.

The $2.2trn industry is still somewhat divided in its opinion about whether extra transparency is a good thing. A panel on a Linedata conference today said some managers were still not providing the data potential clients needed.

The Jumpstart Our Business Startups (Jobs) Act will help rectify this.

When the outside world – such as journalists – speaks with some hedge funds, particularly those with US connections, the conversation can end in an uneasy, confusing, and ridiculous dance.

This is sometimes not the manager’s fault – one based in London said recently: “We would love to be able to tell you about our funds, their performance, but we simply can’t, because our US lawyers say the regulators will see that as us advertising”.

The conversation then becomes ridiculous – “you can say we run hedge strategies, but not use the words ‘hedge fund’. You cannot say we run ‘hedge funds’, but saying ‘programs’ might be okay. You cannot mention performance from us, but maybe this investor [hands over phone number of fund of funds] can help you with that. We can talk to you about markets, but not how the fund invests in them.”

No-one is left happy.

The outside world receives a bafflingly obscure description of a manager who is clearly interested in hedge funds, but may or may not run them, and may or may not have made or lost money running them.

The same restrictions apply to other privately-placed funds, such as private equity and other alternative portfolios.

The status quo can also create hazard for hedge funds dealing with reckless or ill-informed journalists. One described a conversation with a journalist recently – the journalist’s performance figures from an independent source were wrong, but the manager could not correct them, and was warned not to do so by their lawyers. “There was nothing we could do, it was all very frustrating,” the manager said.

The present marketing laws are also open to different interpretation of how much managers can talk to the outside world.

Typically, European managers, even those who are SEC-registered, are more comfortable talking about performance, and some have regulated parallel Ucits funds they can refer to. This in itself makes a mockery of them not being able to discuss their offshore hedge funds.

The situation also gives managers a competitive advantage of sorts if they are more willing to discuss their funds, if potential allocators are looking for names and statistics.

Some may say ‘fortune favours the brave’ manager who is willing to talk, but those managers who believe it is ‘better [to be] safe than sorry’ are at a distinct disadvantage.

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