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Hedge Funds Won't Rush to Advertise Even After Ban Lifted

Largest Firms Most Likely to Test the Waters, But Restrictions Remain

By Published on . 2

For those hoping a new rule from the U.S. Securities and Exchange Commission would lead to a flood of advertising from hedge funds and private equity firms, think again.

While the regulator voted Wednesday to lift an 80-year-old ban on public advertisements by firms seeking private investments, new marketing efforts will be subdued thanks to strict compliance requirements.

"You're not going to see a rush," said Jay Baris, a partner at law firm Morrison Foerster. "Firms are testing the waters."

Credit: Bloomberg

Large publicly-traded asset managers like KKR and Blackstone will likely be the first to take advantage of the new rule since they have more resources and typically already have an in-house marketing department. "The first firms that will advertise will be the big firms," says Stacey Haefele, president and chief executive at HNW Inc., a marketing and technology firm serving the financial services industry.

But large firms may not immediately advertise since they have networks of investors and also typically use word of mouth to bring in new ones, Mr. Baris said.

Smaller firms may also be interested in taking advantage of the new rule, which was mandated by the Jumpstart Our Business Startups Act more than a year ago, but they may be forced to wait due to limited marketing budgets.

For both large and small firms, the new rule may simply mean that they can now talk freely to the press and on their websites about their funds. "Some fund managers will only want to be more visible and transparent," says a hedge fund industry source that declined to be named. "They will no longer feel like it's jeopardizing their business."

It's unclear how much money would be funneled into the advertising and marketing industry as a result of the new rule, but alternative investment firms haven't historically had large marketing budgets and are unfamiliar with advertising rates.

"They're in for a rude awakening in terms of how much a campaign costs," Ms. Haefele noted, adding that many hedge funds also don't value marketing and advertising much. "They'd be shocked at what it costs because they're not used to it."

Most firms will likely stay off TV because of suitability issues and requirements to sell only to accredited investors. The rule "comes with some caveats," said Mr. Baris. "A hedge fund can't place an ad on the side of a milk carton. You have to make sure you come in full compliance with the requirements."

Since firms only want to target a defined audience, TV ads may be too expensive. Instead, firms may turn to print ads and reaching out to investors at forums, conferences and through other types of field marketing. "You'll see newspaper ads and you might see some low-key advertising in high-end magazines," Mr. Baris said.

Advertising on firms' websites and on social media sites would also make more sense than TV. "You don't need a big budget to advertise in social media," he added.

Ms. Haefele said hedge funds should target advisors and the broker/dealer community to avoid reaching out to investors who aren't qualified.

SEC commissioners voted 4-1 to lift the 80-year-old ban on advertising, which was initially intended to make sure that smaller investors aren't lured into taking inappropriate risks. The new rule will take effect in October. It will also apply to startups, which raise money in private placements. While they may want to take advantage of it, especially on the internet, startups will also be burdened by compliance.

"I'm not anticipating a big boom," Ms. Haefele said. "There may be a flurry of activity at first and it will settle down."

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