It finally happened. The powers that be in the hedge fund world have convinced Congress, the Senate, and in a few days, the President of the United States that by allowing hedge funds to advertise, hedge funds will in turn create jobs. Pure Genius. We knew hedgies were smart, so to give elected officials hope that something, anything, will create jobs and not cost the American people a dime…SOLD!
Say hello to the JOBS act, which stands for, Jumpstart Our Business Startups Act. “This legislation is intended to help start-ups raise capital and go public, and is positioned as a bill with bipartisan support aimed at making it easier for small businesses to find investors early and to continue to grow in the public markets by lowering some of the bureaucratic barriers. It also promotes “crowd-funding,” a mechanism by which entrepreneurs can raise up to $1 million online from individual investors with minimal financial disclosure.” (I took part of this definition from an article somewhere) But most important of all, it lifts the almost 80 year old ban on hedge fund advertising.
This is a monumental change in the way hedge funds will now be able to market themselves. Some colorful ideas are in articles like this one: http://blogs.wsj.com/deals/2012/03/28/jobs-bill-opens-door-to-hedgie-advertising/.
Now frankly, while it is fun to think about the possibility of firms like Paulson & Co. and D.E. Shaw naming stadium after themselves, (narcissists!) in my opinion, the biggest beneficiaries of this rule change will be the emerging hedge fund managers. Emerging managers, those with under 50mm in assets and less than 5 year track records, consistently have the hardest time getting their message out to the investor community despite consistently outperforming the billion dollar plus managers. The reasons why they have a hard time raising assets are fairly simple. The largest reason being, institutional investors have been slow to adopt emerging manager investing. Other reasons include investors not wanting to be too large of a percentage of total fund AUM, restrictions on any fund with less than 3 year track record, certain pedigree requirements and also select service provider requirements. I believe this bias away from emerging manager investing is changing, however, with the proliferation of separately managed accounts because more institutions are willing to make an investment with an emerging manager (with a great track record of course) due the high degree of transparency and liquidity the SMA structure provides. Now the problem is, how does an emerging manager get in front of institutions? By advertising of course! Prior to the JOBS act, there were/are (at the time I am writing this) very few ways a small manager can get in front of investors. Some of the only ways are through friends and family, existing contacts and colleagues, hedge fund databases (like my own, HedgeCo.Net), investor conferences and small RIA introductions. I would say third party marketers/broker dealers, but there are very few, if any 3pm shops that take on new or sub 50mm funds. I also might say capital introduction groups at the Prime Brokers or Mini Prime Brokers, but they don’t ever provide service to smaller funds (regardless of what they tell you!) So advertising is frankly one of the only ways that talented managers can get their strategies in front of thousands, dare I say millions, of people within a reasonable time frame at a cost that more than likely won’t break their budget. This is truly a game changer for those fund managers who have great track records and no marketing connections.
View full blog entry on Evan Rapoport’s Capital Introduction Blog