Jeff Benjamin

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Jeff Benjamin breaks down the game for advisers and clients.

What's so bad about hedge fund advertising, anyway?

Fear-monger logic falls short

Jul 12, 2013 @ 3:22 pm

By Jeff Benjamin

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Earlier this week when the Securities and Exchange Commission voted in favor of lifting a 70-year ban on hedge fund advertising, there was a slight buzz in the wonkiest corners of the financial world.

Beyond that, the news seemed to quickly fade.

Sure there were some snarky pundits predicting a suffocating wave of hedge fund ads, and there have been critics claiming that every innocent citizen is now at risk of accidentally investing in a hedge fund.

But mostly it seemed the financial markets are focused on bigger fish and the main stream media continues to have no idea what hedge funds really are to begin with, so anything coming from that direction is probably useless.

With that as context, and with nearly two decades of experience writing about alternative investments, I must say most of the opposition to advertising by hedge funds is pure nonsense at best.

I can understand opposition from something like the mutual fund industry, because fewer restrictions on marketing and advertising could ultimately help private investments like hedge funds attract some mutual fund investors.

But keep in mind, the advertising rule change which won't take effect for at least 60 days, doesn't change any requirements regarding investor net-worth minimums.

The way I see it, allowing an investment class that is already restricted by law to wealthy individuals and institutions is no different than allowing BMW or Mercedes-Benz to publicly advertise cars.

Clearly, everyone can't afford a brand new BMW, but you don't see any outrage claiming those sexy car ads are going drain grandma's retirement fund.

But even the market forces and income-related restrictions are apparently not enough for some opponents of hedge fund advertising.

“The idea that hedge funds need to be available for general solicitation doesn't make sense and there's no need for it,” said William Galvin, secretary of the Commonwealth of Massachusetts, and a staunch opponent of hedge fund advertising.

Asked how the simple process of advertising could cause harm or increase investor risk, Mr. Galvin said, “It will allow these high-risk investments to be in the mainstream of investable vocabulary.”

Mr. Galvin is probably a very smart man, but his argument against hedge fund advertising almost sounds like he believes the best way to protect investors from “high-risk” investments is to prevent them from learning about them.

“In an investment climate like right now where traditional means of securing returns is harder to come by, especially for older investors, some of these things may be attractive to them,” he added. “And now, with advertising, people will be hearing more about hedge funds.”

Okay, yep, that's what he meant. If we can only prevent people from hearing about hedge funds we will be able to better protect people from the downside risk associated with hedge funds.

The reality is nobody should expect to see hedge fund ads plastered across highway billboards or tucked in between potato chip commercials during Jeopardy.

For most of the $2 trillion hedge fund industry it is more about less-restrictive marketing than it is about traditional advertising.

Just ask Phillip Goldstein, hedge fund manager and principal of Bulldog Investors.

Mr. Goldstein has spent the past several years in legal fights with Mr. Galvin's office because Mr. Goldstein responded to an unsolicited request from an individual for information about his hedge fund.

Because the inquiry came from an individual who didn't meet the net-worth requirement to invest in a hedge fund, Mr. Goldstein was charged by Mr. Galvin with illegal hedge fund advertising.

Mind you, the individual never invested in Mr. Goldstein's fund.

“I don't know why it took so long to change the rule, but it does restore some sanity to the process of private companies trying to raise capital,” Mr. Goldstein said. “The idea that hedge funds didn't have to right to advertise like every other business in the world is absurd.”

Well said.

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