For decades, the hedge fund industry has been restricted from advertising publicly to consumers by the Securities Exchange Commission. This fact has been no surprise to the industry, as many who do engage in such investments are expected to be well-versed in this area of investing. The idea of neophytes throwing money into such funds blindly has always been the chief concern of regulators, especially with the very nature of how hedge funds maintain their success. With that said, the world of marketing hedge funds may be changing dramatically soon.
Hedge fund portfolios by their very nature involve pooling of private equity. As a result, the makeup of a hedge fund’s investments have also been kept private except to the customers involved. Yet now, the SEC is considering the ability for hedge funds in general to be allowed to market to the general public in similar fashion as regular mutual fund brokerages. This represents an entirely different customer access method than the current private referral system hedge funds have had to rely on for years.
Not everyone would be allowed in, however. First off, new customers have to meet specific entry thresholds which include:
- A minimum investment of $1 million per investor in many funds
- A net worth of personal assets reaching at least $1 million as documented by the customer, not including the primary home
- Alternatively, at least $200,000 in annual income earned for at least the previous two years
Fund costs aren’t cheap either, which may scare away a number of prospective customers. Fund managers get to charge fees including 2 percent of assets invested as well as 20 percent of the profit made. The amount can be shocking when a normal mutual fund normally charges 1 to 2 percent of earnings annually and a small transaction fee of $25 to $50 per trade.
The new SEC flexibility on hedge funds is not in place yet and some say it may take a while. The original proposal was floated for comment in 2012 and is still under drafting development. That said, many market insiders are expecting the floodgates of marketing to open sometime in 2013. Many fund managers are already probing for early research of what’s involved by talking to advertising firms.
The grand hope is that the change, if allowed, will bring in more funds for investment which then often go to new and growing businesses that need capital, thereby improving the economy as a whole. This push is just one aspect of the Jumpstart Our Business Startups Act of 2012 enacted by Congress in 2012.
So a marketing change is afoot in the hedge industry; it’s just a matter of how much advertising will be allowed to go forward.