Could the Hedge Fund Marketing Ban Come to An End?

Hedge funds are a unique investment vehicle. They have unique characteristics that allow them to avoid regulation – specifically, many hedge funds avoid registration and regulation as investment companies by relying on sections 3 (c) (1) or 3 (c) (7) of the Investment Company Act of 1940. However, with this advantage comes an important downside – hedge funds are prohibited from soliciting business or advertising its services in any way by both the Securities Act of 1933 and the Investment Advisers Act of 1940. ”A hedge fund typically begins its venture by offering securities to investors utilizing Section 4(2) of the ’33 Act and the safe harbor rules of Regulation D, particularly Rule 506. Under Rule 506, the offering of the fund does not have to be registered as a security with the Commission or any state, but instead employs a notice filing,” according to the SEC. ”A main premise of this rule is that there will be no general solicitation or advertising.”

According to FINAlternatives, the ban that prohibits hedge funds from advertising may be almost over. Barack Obama serious

“The JOBS Act, which President Barack Obama has suggested he would sign if it is passed, would eliminate the prohibition on the marketing of private placements, including hedge funds and private equity funds.” FINAlternatives writes, ”The JOBS—Jumpstart Our Business Startups—Act has already been passed by both houses of Congress; it awaits a second vote in the House of Representatives after the Senate amended the original measure passed by the House. Approval and the president’s signature are expected by next month.”

“The bipartisan bill, which President Obama is expected to sign next month, enables hedge funds and private equity firms to solicit investors directly, instead of through third parties that typically vet the firms before introducing them to clients,” reports the New York Times.

On the one hand, removing the ban will do much to improve the industry’s transparency. Because of the ban on advertising, hedge fund “managers generally take a cautious approach and strictly limit all types of communications about their business,” said Managed Funds Association President Richard Baker. “For example, private fund managers generally will not respond to press inquiries, even to correct inaccurate reports.” It also means that when a qualified investor wants information about a fund, he or she may find that the data actually available to him or her is very limited.

With the ban removed, hedge funds may not actually advertise – after all, investors have to meet certain qualifications, so you aren’t going to see many billboards talking about a hedge fund – but it will improve the information available about hedge funds, their investment strategies, top picks and performance. As such, it should become easier for investors to make an informed decision but it should also allow do-it-yourself investors to better “monkey” hedge funds.

But, on the other hand, there could be some caveats. As the New York Times writes, “While the bill could ease the path to fundraising, it could also introduce new risks to small investors unaccustomed to the complex and risky strategies the firms deploy.” It could also make it more difficult for investors to do due diligence. While hedge funds have always been a case of “Buyer Beware” – and that’s why those investing in hedge funds must be “qualified” –the relaxation of the hedge fund rules will likely open things up more for the smaller firms. Larger hedge funds, like John Paulson’s Paulson & Co, have more institutional clients and as such have no need for such marketing.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!