Despite being granted permission to advertise their products to a wider audience, a vast majority of hedge funds have shown no interest in advertising publicly according to results from a survey by research firm Preqin Ltd. The survey of 150 private equity and hedge fund managers found that only 4 percent of hedge fund managers have registered to market under the Jumpstart Our Business Startups Act, more commonly known as JOBS Act. There was an exception, however, as hedge fund Balyasny Asset Management, which manages $4.3 billion, is among the few firms that actively advertised its funds.
In September last year, the US stock market regulator Securities and Exchange Commission (SEC) permitted hedge funds to market themselves directly to accredited investors. The lifting of ban on advertising was intended to give alternative investment managers more freedom and to enable new and small hedge funds to reach out to deep pocketed investors. Because mutual fund advertisements have been widespread for many years, there were expectations that once the SEC approved the JOBS act, there would be a flurry of advertisements from hedge funds. But such a outbreak hasn’t materialized.
The Preqin survey found that 8 percent of hedge fund managers never intend to market their products and a further 55 percent said they have no current plans to market.
Reasons For Reluctance
While costs associated with marketing is cited as a key reason for the poor takeoff, there appears to be larger issues which hamper hedge funds from engaging in mutual fund-like advertising. Hedge fund managers often spend time privately nurturing long term relationships with large funds and high net-worth individuals. This is important because most hedge funds have multi-year lock-in clauses and fund managers look for investors who do not freak out over the volatility that comes with investments. Fund managers also prefer investors who do not inhibit their investment style.
Laurel FitzPatrick, co-head of the hedge funds practice at Ropes & Gray LLP was not surprised by the lack of interest among hedge funds in self-advertising. In a statement she says, “I don’t think most managers felt a real need for this. It’s not a retail product; nobody wants to take out a Super Bowl ad,” adding, “A general solicitation is really more suited for a different kind of product — something that looks more like a mutual fund than a hedge fund or a private equity fund.”
An interesting find from the survey was that a fifth of hedge fund managers felt that marketing would be perceived negatively. The fear that advertising may attract regulator attention and more frequent audits also acted as a turn off. Under the proposed rules, funds soliciting for capital are required to do investor verification and prove investor credentials by reviewing private financial information such as tax returns and recent balance statements. Scott Moehrke, who is the head of the investment management practice group at Kirkland & Ellis LLP, expressed apprehension about such requirements saying “It’s very difficult to put yourself in a situation where you have to ask for more information than another fund that’s not using general advertising”.
Impact On Job Market
The original idea behind lifting the ban on advertising was to indirectly boost the job market by making it easier for aspiring hedge fund managers to reach out to accredited investors. But the lackluster response from hedge funds suggests that the net positive effect on jobs, if any, as a result of the rule change is likely to be minuscule.