Wednesday, 19 March 2014
Last September the much anticipated JOBS Act became law in the United States. The intention of the act was to make it easier for small businesses to raise funding in the US.
An unintended consequence of that act was that it also lifted the long standing ban on hedge funds marketing themselves to the general public.
Since the new rules came into force nearly 6 months ago it is worth asking the question – has the JOBS Act been a new opportunity for alternative fund managers – or merely a damp squib?
The take up of marketing by hedge fund managers has been very slow to date. The SEC has added additional burdensome requirements for hedge funds seeking to advertise and this has meant the rollout of marketing by many companies has been delayed or cancelled.
Under new SEC rules hedge funds that engage in marketing may be subject to additional reporting and audits. Managers are understandably reluctant to add more regulatory oversight, given the level of increased regulation many have struggled with since the economic crash.
While these rules are unfortunate and have dramatically slowed down the adoption of the JOBS Act by the alternative community, in many ways they are not surprising – the SEC has been against the JOBS Act from the beginning. As an organization it does not agree with hedge funds being marketed to the general public.
Hedge funds also need to check the status of investors before taking their money to ensure they are “Accredited Investors”. This means that they earn over $200k peer year and have assets of over $1million outside their family home. This verification may present a challenge for some hedge funds. Third party administrators may very well be able to assist fund managers with this investor verification process.
We expect a few pioneers to go first and that’s what we have seen to date. ffVenture Capital in New York recently announced it had exceeded its $50 million target for a new fund and had used the new SEC rules as part of the process (Link – http://techcrunch.com/2014/01/14/ff-rose/).
Similarly Monterrey-based Topturn Capital partnered with Vancouver’s investment marketing firm Meyler Capital to produce a very effective video advertising their services, interviewing the founders and tying in a professional surfer in the process. The video achieved widespread media coverage and has successfully raised Topturn’s profile across the industry (Link - http://www.cnbc.com/id/101352374).
If these early marketing campaigns continue to be successful at attracting investors or substantially raising the manager’s profile, we might see a situation where more hedge funds begin to look at actively marketing themselves to the public.
To date there is not much sign that the larger players are moving outside their traditional marketing comfort zone and targeting the wider population. A number of big hedge funds have stated their intention to advertise (for example Skybridge) but this has not happened to date. Some managers may feel that advertising publicly might indicate that they are struggling to attract new capital or have fallen victim to a flood of redemptions.
Hedge funds in recent years have received more and more of their subscriptions from large institutional investors, compared with their traditional high net worth individuals. One hope for the JOBS Act was that this trend might be mitigated if more Accredited Investors started to invest in alternative investments. While this has not happened to date, it is still early days.
While we have yet to see the JOBS act make serious inroads, there is certainly discussion taking place within many hedge fund shops regarding whether this is something they should consider.
Many alternative fund managers have been so busy ensuring they are regulatory compliant (FATCA, Dodd Frank, Form PF, AIFMD, EMIR etc.) it is not surprising taking advantage of the JOBS Act has not been high on their radar. Perhaps this will change over the next couple of years as the post-2008 regulatory tsunami begins to dissipate. It is certainly an area they will be keeping an eye on over the next year or so.
For the time being we expect larger established managers will continue to choose safety and stick to their time honored (and largely successful) investor roadshows and industry networks. Perhaps it is the smaller boutique managers who will prove the exception when it comes to advertising in 2014.
Shane Brett is Managing Director of Global Perspectives, an alternative investment & asset management consultancy based in London & Dublin
Contact: email@example.com www.globalperspective.co.uk