It’s a bit of an understatement to say the hedge fund industry has come under tremendous scrutiny in recent years. Regulators and politicians have engaged in a race to impose their collective will and new rules on the industry as a whole.
Fair to say that the vast majority of newly enacted or proposed regulations could be considered limiting in nature — indeed, onerous to some. One exception is the Jump-start Our Business Start-ups Act, or JOBS Act, signed on April 5th by President Obama, which is intended to remove long-standing regulation in order to spur job growth and the U.S. economy. It effectively removes the general solicitation and advertising prohibition for rule 506 exempt private offerings.
While the original proposal was warmly received and celebrated as a potential boon for hedge fund managers, the euphoria has since subsided amidst questions that have arisen regarding the ultimate “real” impact on the industry.
Advanced Billing
History is replete with such initiatives that failed to live up to their advanced billing. Whether the JOBS Act will succeed or fail is indeed the debate amongst fund managers as they await the scheduled July release of the SEC’s new regulations that will effectively enable hedge fund managers to generate interest in their funds by engaging in advertising and media broadcasts, create public websites, initiate social media and email campaigns, and any number of other marketing strategies.
As is generally the case, one’s viewpoint has much to do with where they stand.
Larger funds tend to be fully funded and generally have no shortage of investors ready to invest. Nor do they need to spend much in the way of marketing dollars as their targeted investors are primarily institutional in nature and unlikely to be influenced by such efforts. Moreover, such investors might view expenditure of this nature as misguided and wasteful—negative impressions a manager would most certainly seek to avoid.
According to John Brynjolfsson, CFA, the fervor surrounding the new regulation is much ado about nothing. “This doesn’t sound like it would have a major impact on how we do our business,” he says. “The big takeaway is that it wouldn’t impact me one way or the other.”
On the flipside, the Hedge Fund Association, an industry trade group, believes that relaxed rules governing advertising and solicitation will likely help hedge funds in their overall efforts to raise assets. Moreover, emerging managers would be more enticed to cast their lot and enter the industry.
Overall, it does stand to reason that smaller, less well-known funds would gain great benefit given their new found ability to communicate directly with a wider range of investors under the provisions of the JOBS Act. “A fair number of smaller to mid-sized firms are eager to see less onerous restrictions in marketing to investors,” says Ken Heinz, president of Hedge Fund Research.
Marketing Comes at a Cost
Notwithstanding the current debate, there remains the practical issue of cost — effective hedge fund marketing doesn’t come cheap.
Even with the ability to do so, many smaller funds will find such endeavors beyond their means. “Smaller funds are hungrier for new investors, but at the same time have smaller budgets to spend on advertising,” says attorney Kevin Scanlan, a partner within the financial services group at Dechert LLP.
The question of who will ultimately flip the bill when it comes to enhanced forms of marketing is indeed a tricky one.
Going forward, new funds will most certainly seek to pass on at least some portion of the cost to investors. That’s probably not an option for most existing funds, as it’s unlikely such costs would have been foreseen or covered in placement memorandums. In those cases, costs associated with advertising would likely be treated as a manager expense — a fact likely to give pause to any manager contemplating advertising and its potential benefits.
Questions remain, no doubt, but what’s sure is that in time large and small managers alike with seek to fully leverage any and all advantages availed due to the enactment of the JOBS Act. According to Tripp Kyle, partner at Brunswick Group, “It’s a dramatic change from where the industry is… I think it presents a real opportunity for firms to evolve their mindset from what they can’t do to what they can and perhaps should be doing.”
