Can you see hedge funds running commercials?

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The hedge fund industry is due to change rapidly because of a little-publicized provision of the recently passed JOBS Act.

Traditionally hedge funds were barred from soliciting and advertising to the general public in exchange for being exempt from registration with the SEC.    The rationale, hedge funds offer risky investments that are only suitable for savvy investors who can fend for themselves without government protection.     Until now!

The JOBS Act, passed in April, was intended to help small businesses attract capital.   However, it included a provision to allow hedge funds to solicit and advertise to the general public through normal channels, i.e. TV, radio, print and other media

As the SEC struggles to establish guidelines to regulate new provision of the JOBS Act, there is no doubt it will benefit the industry. The hedge funds with deeper pockets can access TV and radio while smaller players can utilize print ads, internet banner advertising and pay-per-click campaigns.

Arguably, advertising would increase transparency in a generally secretive industry, but what about investors?     Did the general public suddenly become financially sophisticated to understand these ads and to successfully navigate through the hedge fund world?

The ability of hedge funds to access general public signals a redirection of their focus from wealthy Americans to the broader public.     However, some economists argue that this is not a healthy direction for the financial sector.

Some of their concerns include the possibility that softer rules could open the door to shady operators targeting less savvy investors who could be misled about potential returns.

Also, it will take substantial resources for already under-funded SEC to monitor contemplated advertising guidelines and less ethical players may not adhere to the requirements of the law.

Plus, the general public simply lacks the financial literacy and sophistication to determine whether a hedge fund’s claims sound genuine or suspicious.

For example, if Bernie Madoff could advertise to the general public, his ponzi scheme could have extended beyond his wealthy investors.     Or the subprime mortgage crisis where people who could not afford a house felt victims to mortgage brokers and inflated their financial well- being to qualify to buy the American dream house.

Especially, at high risk are investors who might have financial means to invest a large sum, but no time for due-diligence and self-education to even develop financial sophistication.    An unethical hedge fund predator might easily inspire them to inflate their financial statements to simply “get in” and be part of that “elite” hedge fund club with promises to make them rich.

In summary, permitting hedge funds to advertise to the general public may not be such a good idea.    Hedge funds are in the business of high octane finance while the general public runs on regular unleaded.

Anna Timone (195 Posts)

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