Investing: Hedge funds court the masses

Is America ready for hedge fund ads? asked Halah Touryalai in Forbes.com. Last week the Securities and Exchange Commission lifted an 80-year-old ban and ruled that private investment groups, venture capitalists, and unlisted companies “can occupy any billboard, commercial spot, and newspaper ad they well please.” The intent is “to make it easier for companies to raise money, and in theory hire more people.” A noble idea, said James Greiff in Bloomberg.com. But what about protecting investors? These firms aren’t regulated like public companies or bond issuers and can “choose what information they disclose to investors.” Ads were banned in the first place because soliciting private placements became “an area of widespread abuse in the run-up to the stock-market crash of 1929.” Granted, to invest in these funds you still have to be “accredited,” defined as having a net worth of $1 million (excluding your home) and an annual income of $200,000. But these days, having $1 million doesn’t make you a savvy investor. Ads may help hedge funds raise more money, but they’ll “create many more unhappy investors in the process.”

Relax, said Dan Primack in CNN.com. This change just makes the “very difficult process” of fundraising more efficient by allowing hedge funds to get their message out “more broadly via media that didn’t exist” decades ago. If you’re an accredited investor who doesn’t like to fiddle around with alternative investments like hedge funds, no ad is likely to change your mind. And “if you’re an unaccredited investor, these ads will have the same practical impact on you that Porsche ads have on me.”

If that were true, “the wolves of Wall Street” wouldn’t be so keen to advertise, said Heidi Moore in The Guardian (U.K.). They clearly covet the money of the some 9 million Americans who are millionaires on paper, most of them Baby Boomers with inflated retirement accounts they’ll soon cash in. But those unexperienced investors “should be wary.” Hedge funds are risky, they charge “exorbitant fees,” and when it comes to returns, most of them, “for all their fancy strategies, don’t beat the S&P 500 index.” Yet you can be sure that unsophisticated investors—otherwise smart people like doctors and lawyers—“will be seduced by the glamour attached to the idea of investing in hedge funds.” And there can be no doubt that those investors won’t be the ones profiting from “Wall Street’s steady, SEC-enabled creep into Main Street.”

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