Why Aren't Hedge Funds Advertising?

 

01 11월, 13:01www.newyorker.com

Since September, hedge funds have been allowed, for the first time, to openly advertise their services . You might expect Anthony Scaramucci to be the first in line. Unlike many hedge-fund types, Scaramucci, the flamboyant founder and co-managing director of the investment firm SkyBridge Capital, doesn’t shy from the spotlight: he is a frequent guest on CNBC; he runs the

 

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 Conference, a lavish annual confab that is a fixture of the hedge-fund world; one of his books is colorfully titled “Goodbye Gordon Gekko: How to Find Your Fortune Without Losing Your Soul.” Scaramucci told me that he does intend to advertise—but even he is waiting until he has a better sense of the implications. “This is a game of dodgeball,” he said, “and we are going to let other people get hit in the head with the ball before we start doing it.”

 

 The advertising change, the result of a provision of the

 

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 (Jumpstart Our Business Startups) Act, has inspired quips about billboards over the Lincoln Tunnel and sixty-second spots during the Super Bowl. But so far, only a handful of obscure hedge funds seem to have taken up the offer, placing a couple of ads on social-media sites. Since the first hedge funds were launched in the nineteen-fifties, they have been structured as limited partnerships that aren’t required to register with the S.E.C. as investment advisers. Not being registered also meant they weren’t allowed to run advertisements or make other “general solicitations.” Some construed this as prohibiting media interviews or even building Web sites listing investment results.

 

 Hedge funds, though, have powerful incentives to seek more investors: a typical fee amounts to two per cent of assets under management and twenty per cent of any profit. The more investors, the higher the profit. And yet, it appears they are being decidedly cautious about their newly won freedom to advertise.

 

 There are plenty of explanations for this. While the

 

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 Act dropped the ban on hedge fund advertising, cold-calling, and general “solicitation,” hedge-fund marketing must still offer assorted disclosures and disclaimers. Moreover, U.S. hedge funds can take money only from “qualified investors,” which basically means rich people. In any case, many hedge funds require an initial investment of a million dollars, so they’re not exactly looking to reach the same broad demographic as, say, Walmart. Meanwhile, four of the six largest hedge-fund portfolios are closed to new investors, as are scores of other big funds, so they have no reason to advertise.

 

 There’s another twist, too. Although hedge funds used to mostly manage the investments of wealthy families, in the past dozen years or so they have attracted a great deal of institutional money: pension funds, endowments, and foundations now provide some sixty per cent of the hedge fund industry’s $2.5 trillion in assets. So, sure, a hedge fund can now aggressively market to fourth-generation beer heirs in Milwaukee in the hopes of winning a five-million-dollar investment. But on a single day in September, the ninety-seven-billion-dollar State of Wisconsin Investment Board, which oversees pension assets for state and local employees, said it was putting two hundred and seventy-five million dollars into three hedge funds. And there’s a well-established catechism for selling to these kinds of institutions: a hedge fund’s marketing rep shows up with a PowerPoint presentation delineating how well the fund has done and how clever and unique its process is. “They’re not just going to take out an ad or do P.R.,” Thomas Walek, the president of WalekPeppercomm, a New York public-relations firm with many hedge-fund clients, told me. That’s simply not an effective way to win over the staff and board of trustees of these institutions—not to mention the outside consulting firms on which most institutions rely to recommend prospective investment managers. (Rich families, too, increasingly use gatekeepers: many take advice from private banks and brokers, or give them discretion to choose investments.)

 

 And then there’s a more fundamental problem with brand advertising: the chief investment officer of a major Chicago foundation told me that he and many of his peers would see a hedge-fund ad as “a sign of desperation.” People might wonder, he said, “Why do they need to advertise?” I asked the head of a Connecticut P.R. firm that specializes in hedge funds about advertising, and he used the same word: “desperation.”

 

 Instead, at least initially, it looks like hedge funds may follow other paths. They may be more eager to write market commentaries and be interviewed to get their name out and show how smart they are. Lawyers were first allowed to advertise in 1976, and personal-injury firms advertise all over the place, but white-shoe firms certainly aren’t buying spots on late-night television and handing out matchbooks. Instead, they distribute high-minded essays and cadge invitations to speak at conferences; hedge funds could do the same. Hedge funds also could become sponsors of high-profile events, paying to associate themselves with everything from museum exhibits and cultural gatherings to upscale golf and tennis tournaments. And then there’s social media. Hedge-fund Web sites, which used to offer little information besides the fund’s name and mailing address, can now post market analyses and forecasts—while also touting their investment strategies and results. And then they can use Twitter, Facebook, and LinkedIn to drive traffic to their sites.

 

 As for old-school advertising, in print and on television? Everyone is watching everyone else. If enough funds start advertising—and find that it brings in customers—maybe they won’t mind displaying a little “desperation.” But don’t look for a big ad at the entrance to the Lincoln Tunnel anytime soon.

 

 Photograph by George Rose/Getty.