Hedge funds will soon be venturing into uncharted territory—marketing sophisticated investments, once the purview of the über-wealthy and institutional investors, to the broader retail market.
The Securities and Exchange Commission (SEC), pursuant to a mandate put forth in the American JOBS Act of 2011, has finally met its duty under the law and lifted the ban on public advertising that has shackled the private equity and hedge fund industry for 80-years.
The July 10th, 2013 4 to 1 vote in favor of lifting the ban was taken despite the concerns of apprehensive investor paladins who inundated the Security and Exchange Commission (SEC) with concerns that repealing the advertising ban had the potential to increase the incidence of fraud in the industry.
The SEC responded to these concerns with tougher restrictions on sales literature, advertising and direct mail solicitations. Additionally, revised filing requirements will provide the SEC enhanced abilities to track the private offerings market. The SEC is also considering barring felons and other ne’er-do-wells from the playing field but this step and any others will be incremental and follow the initial repeal of the advertising ban at a later date.
Lifting the ban is not likely to have an immediate impact. The requirement that hedge funds deal exclusively with wealthy investors remains unchanged. “Wealthy,” has been and continues to be defined as, an investor with a net worth of $1 million excluding the value of the investor’s primary residence. Congress has precluded any change to this definition until 2014.
Beyond this caveat, other barriers exist to any knee-jerk response from the hedge fund and private equity industry. Most hedge fund firms are fundamentally ignorant with respect to the nuances and costs of marketing and advertising campaigns. Only the largest firms have any semblance of an in-house marketing department. As a result, it is difficult to predict how much money will ultimately be spent advertising alternative investment products in the near term.
Social media sites might be the initial beneficiaries of advertising revenues because the lower costs involved are appealing to firms with little or no advertising budget.
An Innovative Approach
Hedge funds, always the innovators, may enter the retail market via the acquisition of major players in the mutual fund arena. This approach would provide hedge funds with turn-key retail capability.
BlackRock, as well as smaller firms, has launched alternative mutual funds and ETFs, developing alternative expertise by acquiring or investing in alternative focused firms or by outsourcing the investment function to sub-advisors whose specialty is alternative strategies. Industry sources suggest that only about 19 percent of hedge funds have geared-up for retail so far but expectations for the trend to continue are high.
The Jobs Outlook Improves
As inroads are made in the retail market, the jobs picture is likely to improve within the hedge fund industry. Assets under management will continue to grow and newly minted hedge funds, venture capital and private equity firms will come online to capture their fair share of this new market.
There has already been significant growth in the number of hedge funds, with more than 10,000 hedge funds in operation at the close of 2Q13 rivaling the all-time nadir of 10,096 achieved in 2006.