Hedge Fund Ads: What's to Crow About?

Date: Tuesday, July 31, 2012
Author: Stephen Bornstein's Law Blog

In just a few weeks, the SEC is supposed to issue new rules which will trigger the start of hedge fund advertising under the JOBS Act. In addition to wondering what those rules will be, industry professionals are also curious to see which funds advertise first, and what they have to say.

Ignoring even their insider trading embarrassments, hedge funds on the whole have not had a great couple of years.

In 2008, when the S&P 500 was off almost 40%, hedge funds also fell almost 20%, instead of demonstrating their heralded ability to post absolute returns in down markets.

The following year, hedge funds gained over 25%, but the S&P 500 was up just under 25%. Again in 2010, hedge funds were up almost 10%, but the S&P 500 was up over 11%; and, in 2011, the S&P gained more than 5%, but hedge funds fell over 4%.

And, finally, through the first half of this year, hedge funds were up just over 2%, but the S&P gained more than 8%.

All of these results fly in the face of the basic claims for hedge funds which are grounded on their ability to sell securities short. Shorting expertise should mean that, when markets are down, hedge funds should not only lose less than the broad indices, but should actually generate positive returns. What, then, happened in 2008?

Similarly, since the raison d'être of hedge funds is to generate alpha, they should outshine indices in up markets, so what happened in 2009, 2010 and 2011? And what seems to be happening this year as well?

However complicated the answers to those questions may be, the dispiriting message is that, industry-wide, not all hedge funds are winners, and an awful lot of currently operating hedge funds haven't got much to crow about.

My guess is that the largest and most successful hedge funds - which control the vast majority of industry assets -- are unlikely to engage in general advertising since it would be counter-cultural for them to accept retail investors. If true, the only funds really capable of benefitting from advertising are mid-size funds with great recent track records, no capacity issues and sufficient disposable income to defray the considerable costs of promoting themselves in the most fruitful investor markets.

All the other funds are going to have to settle for opening up their websites and friending on Facebook.