Whether Sept. 23, 2013, will be remembered as a red-letter day for the hedge fund industry remains to be seen. On that day, and for the first time in their 80-year history, the SEC began allowing hedge funds to advertise or hand out colorful brochures to any Tom, Dick or Harriet. A New York advertising firm is already pitching hedge funds on the idea of taking out ads for the 2014 Super Bowl, which will be played near the city for the first time ($100,000 will get you a full-page ad in the program book and four tickets to the game).
The lifting of the ban is a result of the Jumpstart Our Business Startups Act, or JOBS Act, bi-partisan legislation that was introduced in late 2011 and signed into law six months later—less time than it takes to craft a pitch book. The law was supposed to take effect in July 2012, but because it was such a seismic shift, the SEC mulled over proposed rules for more than a year before giving hedge funds (and other private investment funds and operating businesses) the green light to advertise.
My guess is that Madison Avenue should prepare for a trickle rather than a torrent of ads, at least at the beginning. After existing for so long in the shadows, don’t expect to see “Got Macro?” on billboards any time soon.
That’s because “You go first” hesitancy exists about hedge fund advertising. I say this as the CEO of an investment firm that has been offering “private placements” in the form of hedge funds and managed futures funds for more than 10 years, and more recently, mutual funds. There are different advertising and marketing rules for hedge funds, managed futures funds and mutual funds. First, the Commodity Futures Trading Commission, or CFTC, continues to ban advertising by certain managed futures funds, at least for the time being. So if your client wants exposure to a fund specializing in, say, oil and gas futures, don’t hunt for any ads about them in local or national publications unless those rules change. Mutual funds, which can advertise, continue to operate under very strict rules about what they can and cannot say about their performance and outlook. Hedge funds, meanwhile, have been given wide latitude to sell themselves to the public with relatively little guidance on how they present past performance. Proposed rules may tighten this up, but even without tightening, the new rules are complicated.
It’s a dilemma for hedge funds: to advertise or not to advertise. If they go the advertising route, hedge funds will have an obligation to verify the eligibility of every investor who comes in the door. An investor can no longer declare that he or she is accredited—they must provide the hedge fund with proof. (Currently, hedge fund investors only have to sign statements that they meet minimum net worth requirements.)
What qualifies as proof? It could be a tax return or some other third-party verification. Understandably, some investors may find this request intrusive—they may not want a hedge fund to know their exact net worth.
To avoid dealing with this new “burden of proof,” some hedge funds might decide not to advertise. Moreover, even though the SEC lifted the advertising ban, FINRA can have a say about advertising under certain circumstances.
Between the SEC and FINRA rules, it’s my opinion that most hedge funds don’t have a clue about how to comply with appropriate disclosure requirements. Sorting it all out will require them to beef up their compliance team—if they can afford to.
No surprise, then, small hedge funds with less than $100 million in assets may find it too expensive to advertise. Meanwhile, many multi-billion dollar hedge funds don’t necessarily need to advertise to find new investors: The largest 100 hedge funds already manage 61% of $2 trillion-plus in hedge fund assets, according to Preqin, an alternative asset database. That leaves the midsized hedge funds as the most likely consumer of Madison Avenue’s talents, which makes predictions precarious.
For those hedge funds that decide to navigate the regulatory shoals, a blue ocean of advertising opportunities awaits them. But others may decide not to venture beyond their present safe harbor.