There are few products in the world with as many confusing and contradictory marketing constraints as hedge funds in the US (and, in fairness, many other jurisdictions). Hedge fund marketers out there know what I’m talking about. Last month, we told you about a study that compared hedge fund regulatory regimes around the world to see if the lax ones were more popular. Despite carrying the mantle of the free market, the US actually had a very restrictive regime when compared to countries such as Australia, Canada, Japan, and even China.
An article in this month’s Journal of Financial Transformation illustrates why this is. The piece, titled “Hedge fund marketing in an era of regulatory uncertainty” covers many of the issues faced by those trying to raise money in the US. It’s a great update on the ebb and flow of SEC edicts over the past year and was co-authored by hedge fund personality James Hedges.
The article describes Congress’ response to the SE having the rug pulled out from under them on hedge fund registration back in 2004. Sensing an opportunity after manager Phil Goldstein successfully challenged the SEC’s registration rule, Congress stepped into create a “legislative override”. While leaving the registration issue in Congress’ capable hands, the SEC embarked on an anti-fraud rule that makes it illegal to break the law (see related posting).
So where does this leave hedge fund marketers today? Unfortunately, not much better off than in the past. Here’s some of what Hedges, who is also the principal of a firm that provides hedge funds with market advice, and his co-authors suggest:
- Avoid speaking to the media about your funds – even if you’re not actively selling, but just “conditioning the market”.
- Avoid “print, radio and television advertisements or solicitations regarding funding or investment matters”.
- When giving presentations, “address the risks associated with hedge funds in general as well as the specific risks associated with the hedge fund being offered.”
- When your fund has a great year, make sure you “disclose the reasons for extraordinary performance…”
- No “mass mailings” except to “individual investors, or a discrete group of accredited investors”.
But probably the most important lesson for hedge fund marketers in this article is that a prospectus “does not satisfy the duty to provide balanced sales materials and oral presentations.” In other words, since hedge fund buyers cannot rely on the rigorous standards of disclosure and reporting required by mutual funds, the sales pitch itself becomes a more critical element of the contractual relationship. Sales people from other fields often find it odd that it’s actually against the law to give an “unbalanced” presentation of the fund. In other words, if you’re a hedge fund marketer, for goodness sake, don’t sell.
As someone who spends a good portion of my day trolling the world’s media to keep on top of this industry, I find that most hedge funds are forced to push the envelope on some of these issues – particularly the ban on talking to the media. The truth is that investment ideas, like all ideas, deserve to be freely discussed. Without the free flow of these ideas, there would be no AllAboutAlpha.com. Banning the discussion of hedge fund ideas not only bumps into first amendment issues, but it also raises questions about academic freedom. After all, many of today’s hedge fund managers are part-time academics (or is it the other way around?)
In any case, small non-institutional funds better keep praying that the SEC doesn’t raise the wealth threshold for investing in hedge funds. Because if they do, there won’t be anyone left to mail to, present to, or even call up on the phone.