How Will the JOBS Act Impact Hedge Funds?

Date: Thursday, September 6, 2012
Author: Paula Vasan, aiCIO

(September 5, 2012) -- The advertising ban for hedge funds is over, thanks to the Jumpstart Our Business Startups (JOBS) Act, leveling the playing field with traditional managers, according to Margolis Advisory Group's President Jeffrey Margolis.

"The JOBS Act will accelerate the institutionalization of hedge funds," Margolis states in a report. "Hedge funds who embrace the new, less restrictive environment will need to build mature, comprehensive strategic communications programs," he continues.

Morgolis' paper notes that much of the discussion regarding the act has downplayed the potential impact of the provision as being only meaningful to the smaller funds. "Large funds—as the typical explanation goes—believe they do not need to proactively market, as they commonly market off their mystique of exclusivity and will prefer to remain 'under the radar' to protect their proprietary investment strategies," he says. "Furthermore, the larger funds are already staffed for one-on-one sales, and many in the hedge fund industry are under the false impression that sales are only based on individual contacts or 'having the Rolodex.'"

Hedge fund investors generally believe that this act will help hedge fund managers raise assets while encouraging emerging managers to enter the industry. But others voice dismay, asserting that the act fails to ensure would-be investors are accredited. "This is a huge disappointment," the Consumer Federation of America's Barbara Roper told Bloomberg News. "It appears that none of the investor protections that we or others have advocated are included in this proposal."

Margolis' comments also come in reference to the US Securities and Exchange Commission’s (SEC) proposal last month to relax rules that have kept hedge funds and private-equity firms from soliciting the general public for over 70 years. Last week, the SEC additionally voted to propose allowing hedge fund advertising open to a 30-day comment period. "There are certainly some unknowns as we await the SEC’s response," the Margolis report states. "But, make no mistake—change is coming to the hedge fund community. Winning firms will embrace this change, not resist it. Firms that take a strategic and proactive approach to managing their marketing communications will be better positioned to compete against their peers and traditional managers."

According to “The Evolution of the Industry: 2012,” an annual KPMG/AIMA hedge fund survey, institutional investors now represent a clear majority of all assets under management by the global hedge fund industry, with 57% of the industry’s assets under management residing in the category. Meanwhile, the proportion of hedge fund industry assets from institutional investors has grown sharply since the financial crisis, as evidenced by a variety of studies. Hedge funds could receive a $1 trillion boost from institutional investors over the next five years as pension funds and managers of other large asset pools are regarding the sector as core and complementary to their mainstream portfolios, Citi claimed in June.

"In the years since the global financial crisis, a new approach to configuring institutional portfolios is emerging that categorizes assets based on their underlying risk exposures," a June report from Citi said. "In this risk-aligned approach, hedge funds are positioned in various parts of the portfolio based on their relative degrees of directionality and liquidity, thus becoming a core as opposed to a satellite holding in the portfolio."