If you think that hedge funds are a cabal that no one knows anything about, you’re probably not watching CNBC, where on any given day a prominent hedge fund manager will pontificate on a particular stock, the sad state of the euro, the debt burden of the U.S. or the evils of Dodd-Frank. Still, I was a bit stunned to see on a WashingtonPost.com news story a pop-up ad with William Ackman’s mug advertising something called the “Floating University.” Ackman, who runs New York–based hedge fund firm Pershing Square Capital Management, apparently offers a lesson on investing for the virtual group.
The telegenic Ackman, with his activist book, is a made-for-TV star. Other hedge fund guys have also become household names. The boyish-looking David Einhorn, who recently was fined $11 million for an insider trading violation in the UK, is one.
Einhorn became famous following CNBC appearances in which he talked down Lehman Brothers in 2008 while he was short the stock. Einhorn was immediately anointed an investment guru.
Hedge fund get-togethers like the annual Ira Sohn Conference or the Value Investing Congress, where managers tout their longs and shorts — and the stocks soar up or down as a result of the ensuing press coverage — are another way selected thoughts from the brilliant minds of finance seep into the public domain.
All this has been going on at the same time that it has been illegal for hedge funds to market to the general public as part of the Securities and Exchange Commission’s private-placement rules that govern them. To comply with those rules, attorneys have advised hedge fund managers not to talk to the media about their funds, or performance, or anything else that might be construed as marketing. They could talk about lots of other stuff, but getting critical pieces of information out of them has been like pulling teeth.
But the rules may finally change — and it’s about time.
Late last year the House of Representatives passed a bill, HR 2940, to amend the private-placement exemption from registration of the 1933 Securities Act that forbids general advertising. Hedge funds weren’t involved in the lobbying to overturn these rules, which also restricted small businesses from such advertising, ostensibly making it more difficult for them to raise capital. Overturning the ban on private placements might help get the economy moving, both Republicans and Democrats agreed. On January 6, the Managed Funds Association filed a petition in support of the bill, asking the SEC to get rid of the ban through the rule-making process. The MFA argued the rules lead to “inaccurate information and misperceptions about the industry.” The Investment Company Institute shot back, saying “the real motivation here is marketing and product promotion.”
Paul Roth, a founding partner of Schulte Roth & Zabel, has long argued for this change and now feels somewhat vindicated by the recent turn of events. “We had awful situations where people inadvertently spoke to the press, and as a result of the state of the law, closings had to be postponed,” he says. If a manager might be construed to be preselling the fund by talking about performance or investment prowess in general, a cooling-off period of 30 days was required.
Some hedge fund executives were surprised by the MFA’s endorsement, saying that many hedge fund managers like being able to hide behind the marketing ban. Of course, they won’t be forced to talk to the press, or to give the public any information on their performance, their holdings or much of anything else. But the MFA has apparently decided that the image of the industry as a secretive one doesn’t work anymore in the age of Internet blogging and 24-hour cable news.
Under current rules, average citizens still don’t have enough money to qualify as hedge fund investors, so if the intent is to keep their money out of hedge funds, what harm could the advertising do? However, average citizens do help pump up a manager’s holdings by buying the stocks a manager promotes on TV. And if I were going to follow the advice of a hedge fund manager, I’d want to know his long-term track record — and that’s precisely the kind of information managers have been forbidden to share with the media.
Scarcity is a principal tenet of capitalism. If goods are scarce, their value goes up. The dearth of real knowledge about hedge funds has made every word out of their managers’ mouths seem precious. “If you’re so smart, why aren’t you rich?” asks the Floating University’s web page.
Maybe it’s because the average person can’t use mystique to his advantage.