Voices is an occasional column that allows wealth managers to address issues of interest to the advisory community. Jeffrey B. Clark, Jr. is managing director at Sendero Wealth Management in San Antonio, Texas.
In September of this year, the SEC made two provisions legal under the JOBS Act that will affect the access clients have to hedge funds and startup companies.
As an adviser, it can sometimes feel like our clients walk around with big targets on their backs. In light of these two rulings, it’s especially important to protect them, as even a few investment errors can have a big impact on a client’s finances. The key is to educate folks and make sure they’re aware that at the end of the day there needs to be method to the madness.
One of the big changes the SEC has made is that hedge funds are now allowed to advertise. This raises some red flags, since many investors are unfamiliar with the complicated ways that hedge funds work. Also, it’s a good rule of thumb that top performing hedge funds don’t need to advertise, so it’s likely that the more desperate funds will target investors most frequently.
That said there are some protections in place. Hedge funds have to qualify people to join the fund and can only use accredited investors. The 3C1 hedge fund can only have 100 investors, each with over $1 million in assets or who have made $200,000 a year for two years. The 3C7 can have unlimited investors but each must have $5 million in assets.