The world of hedge fund marketing has gotten a bit tougher, at least in California. And many third-party marketers are none too pleased about it.

California’s Bill AB-1743 came into effect on January 1, 2011. It prevents any placement agent from soliciting funds from either CalPERs, the state’s giant public pension fund, or CalSTRS, the state’s teacher’s retirement system, unless they are registered as a “lobbyist” in California.

The bill stems from various investigations into alleged corrupt practices between placement agents and members or formers members of the big state fund’s board of directors.

The problem is, third party marketers are basically packing up and deciding they won’t do business with the pensions anymore, according to recent survey conducted by Preqin and reported in AllAboutAlpha. The vast majority of placement agents are saying that the bill puts an unfair burden on them, and they’d rather look elsewhere for business.

A full 84% of placement agents said they will rely less on public funds for sourcing new investment for their hedge fund clients. Nearly two-thirds (63%) said they would not bother registering as lobbyists in another state that enacted similar legislation. This is important since New York and several other states are considering passing similar bills. The other respondents said they’d simply be more selective, perhaps registering in some states where the opportunities were worth it.

Aside from the burden of paperwork, third-party marketers are not pleased with the prohibition against contingency fees in these bills. This would eliminate the financial incentive to put the right hedge funds together with public pensions. They point out that the fees received by placement agents often occur only after a period when both parties have had time to thoroughly check out the arrangement. They also point out that the big funds themselves could be hurt by the new restrictions, as they no longer will be able to take advantage of the investment diversity and potentially higher returns offered by hedge funds.

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