With the $2 trillion
hedge fund industry just weeks away from being able to openly advertise and market individual funds and strategies, the financial advice industry could be facing a whole new set of challenges.
As the 80-year ban on
hedge fund advertising is lifted, there is some concern that more information on alternative investments could lead to more investor inquiries and possibly increased exposure to risky investments.
Randy Shain, founder of investigative due diligence firm BackTrack Reports, said that financial advisers will definitely face new challenges, but he also highlights the new opportunities that will come with
hedge fund advertising.
InvestmentNews: What does hedge fund advertising mean to advisers?
Mr. Shain: It means they will be getting asked a lot of new questions from clients, and advisers will have to sift through all that data or help clients sift through the data. And it's not going to be easy for all advisers to become versed in alternatives.
InvestmentNews: Doesn't that also represent new opportunities for advisers?
Mr. Shain: Yes it does. Hedge fund advertising makes advisers even more needed, and this will be one more arrow in the quiver of an adviser that becomes versed in alternatives. If I become perceived as an expert, I have an advantage. That's what an opportunity means, as opposed to an adviser who decides he's not gong to do it.
It won't be easy for advisers, but it's not a disaster.
InvestmentNews: Do you think hedge funds will target individual investors through advertising?
Mr. Shain: Advertising works, no question about it. And I have to think there are some people somewhere who will be influenced by hedge fund advertising. But I think the vast majority of large hedge funds are looking for institutional money and not individual high-net-worth investors.
InvestmentNews: What kind of hedge funds do you expect to see advertising when it becomes legal?
Mr. Shain: The vast majority of hedge funds are not going to look to market or advertise anyway. The ones that are will be smaller or startups with zero to $100 million under management. Those are the types of hedge funds that might be looking to market to individuals. But, also looking to market to individuals are criminals, and that's kind of the fear right now.
InvestmentNews: As advisers start researching and paying closer attention to alternative investments, what are some of the things they should be looking for or looking out for?
Mr. Shain: If I'm an adviser, I'm reading books on the topic and becoming familiar with operational due diligence.
But some of the biggest red flags to watch for include if a company calls itself a hedge fund, make sure it is. Make sure the individual's credentials fit the firm. For example, I'm not in love with the idea of a real estate developer or an investment banker who starts a hedge fund because it's a way to make some money.
Also, you want to look out for anyone with a lot of legal judgments or litigation in their background.
The easiest thing to do is literally look at what they did before. Find out where they have been working and if they are even a real hedge fund.
