When hedge funds advertise
Jesse Eisinger, today, joins Matt Levine in worrying about the effects of allowing hedge funds to advertise. The all-but-certain consequence is that while the handful of excellent hedge funds will remain highly secretive, a bunch of much less savory characters will start hitting the airwaves with gusto. As Jesse says, “Jacoby & Meyers advertises on television; Sullivan & Cromwell does not.”
You get no prizes for guessing who counts as the Jacoby & Meyers of the hedge-fund world:
“I am hellbent on creating a global brand and the only way to do that is through advertising,” said Anthony Scaramucci of fund of hedge funds SkyBridge Capital, which manages $3 billion in assets and hosts a star-studded industry conference in Las Vegas.
Earlier this year, Mr. Scaramucci had lunch with a midsize New York ad firm he says he could hire if the ban is lifted, adding he was waiting to learn what rules the SEC would issue and for his lawyers to approve any plans he might hatch.
The big problem here is that we seem to be going from one extreme to the other: while the restrictions on what hedge funds can say in public have historically been too strict, they’re now going to be far too loose. As Levine notes, hedge funds will be able to basically say anything they like about their funds, while omitting anything they want to omit at the same time.
It’s very hard to see how any good can come of this. Picking a hedge fund (or, in Scaramucci’s case, a fund-of-funds) is hard — much harder, actually, than picking a mutual fund, and that’s difficult enough. It’s almost impossible that advertising from individual funds will be helpful rather than unhelpful in this respect.
That said, the SEC is dragging its feet here — the new rules were meant to be in place in June — and it’s really not the main culprit: Congress has mandated that these changes be made, and the SEC can’t just ignore one of the few bills to pass with genuine bipartisan support.
It could, however, put in place a series of hoops that any hedge fund would have to jump through before being allowed to advertise. It could require that all ads be run by the SEC first, for instance, and it might also restrict the kind of places that hedge funds can advertise. It could even, if it wanted, force all advertisements to be in print form, with lengthy disclosures a bit like the ones you see in pharmaceutical ads.
But the SEC didn’t do any of that: it’s basically washing its hands of the whole issue, and saying that if Congress wants hedge-fund ads, then Congress is going to get hedge-fund ads. It’s quite a passive-aggressive stance, actually.
As Eisinger says, “the best-case scenario from the agency’s move is a bunch of Paulsons”, with investors buying in at the top and selling at the bottom, “while the worst-case is a bunch of Madoffs.”
That said, I can see one upside. Once the new rule is passed, a lot of hedge fund managers are going to be much happier starting their own blogs and Twitter accounts. They’ve been muffled until now: while reporters have always been able to call them up and have off-the-record phone calls, hedgies have found it much more difficult to get their compliance officers to sign off on public communication. If that kind of thing is now allowed without constraint, we could see an influx of very smart people into the Twittersphere. A blogger can hope, anyway.