When the Securities and Exchange Commission lifted the ban on hedge fund advertising last week, many in the industry applauded the move, saying it was high time that hedge funds and private equity firms got a level playing field against the competition in terms of marketing themselves.
"The lift on the 80-year-old ban that prevented entrepreneurs from advertising their efforts to raise equity is a huge step forward," said Joanna Schwartz, CEO of the crowdfunding platform EarlyShares.com, in a highly optimistic statement about the future for hedgies and venture capitalists. "Economic growth is driven by small business and enterprising individuals who follow their passions, and that requires capital. This ruling eliminates a big friction point in the capital-raising process."
Clearly, there are those who loved the lifted ban. Yet some in the hedge fund industry believe that marketing isn't necessary for these sophisticated investments, and others worry that fraud may be an unintended consequence. Surprisingly, some are plainly against the congressionally mandated rule required by the Jumpstart Our Business Startups (JOBS) Act that allows issuers to use previously unavailable solicitation and ad methods to find new investors.
Adam Patti, CEO of IndexIQ, which sells exchange traded funds that replicate hedge funds, opposes the lifted ad ban because it may ultimately do harm to what until now has been a closed market for sophisticated investors.
"I believe that it could be harmful not only to investors but the industry if there is not a proper amount of education provided to investors who will be seeing all these ads for vehicles they probably shouldn't be invested in," Patti said in a phone interview. "If an investor has a bad experience with an investment, it could be bad for the industry. The lawyers are probably circling already to pounce on the first thing that creates problems."
'The Advisor Should Educate the Investor'
Patti then pointed to the hypothetical example of the billionaire hedge fund manager John Paulson, whose gold fund plummeted 65% through June.
"Paulson's fund has had a horrible performance this year," Patti said. "What about that little old lady watching the Today show with $1 million to invest, and she sees an ad for the Paulson fund, and calls her advisor saying she wants to invest in that fund that she saw on TV? An investor may technically have access to that fund, become more interested, go to their advisor and start clamoring for the fund without knowing the risks. Certainly, the advisor should educate the investor."
On the plus side, BackTrack Reports founder Randy Shain, whose investigative firm provides due diligence background reports on some 7,000 hedge funds, said he was thrilled with the lifted ad ban.