AIMA welcomes US liberalisation of rules on hedge fund solicitation
Liberalisation of hedge fund marketing and advertising rules in the US has been welcomed by AIMA although the industry body urged only accredited investors be allowed to allocate into hedge funds.
In its response to the SEC, AIMA said it supported the changes enshrined in the JOBS Act but insisted regulators take steps to ensure all buyers of hedge funds are “accredited investors.” AIMA CEO Andrew Baker said the new rules would bring the US’s marketing and advertising regimes in line with the rest of the world.
The SEC is currently carving out the final rules although one lawyer from K&L Gates said the regulatory body was likely to force hedge funds to toughen up their procedures when verifying investors are actually accredited. However, there have been few details about what this will entail. As things stand, an accredited investor is defined as an individual with a minimum of $1 million in investable assets.
Several mutual funds have complained to the SEC that retail investors could be targeted by unscrupulous hedge fund managers. This is not a wholly unfair suggestion. The threshold for an accredited investor is rather low. These individuals are likely to be unsophisticated with little understanding of due diligence, which could result in them allocating to managers with very high returns albeit much more risk.
In a worst case scenario, it could lead to unsophisticated investors putting their capital into fraudulent managers. A blow-up or fraud, which hurts retail investors, would undoubtedly dent the hedge fund industry’s reputation at a time when it has already been severely battered by underperformance and misbehaviour during the crisis. It could also lead to greater regulatory scrutiny of the sector and a repeal of the liberalising measures contained in the JOBS Act.
Some, however, are optimistic that hedge funds will not ruthlessly target unsuspecting retail investors. Don Steinbrugge, managing partner at third party marketing firm Agecroft Partners, said retail investors’ minimum allocations are far too low for the majority of hedge funds. Typically, a hedge fund will have a $500,000 or $1 million minimum investment – “an accredited investor with $1 million in investable assets is unlikely to put all of this capital into just one hedge fund,” said Steinbrugge.
Furthermore, most managers want sticky money as they are not set up like mutual fund structures offering daily liquidity. These stringent liquidity requirements will be unacceptable to most retail clients. “Broadly speaking, most of the capital inflows to hedge funds will come from institutional investors such as pension funds, funds of funds, family offices and endowments. However, I do anticipate there will be more high net worth individuals entering hedge funds once the law is changed. We are already seeing more hedge funds being sold on brokerage platforms,” commented Steinbrugge.
The rule changes have been welcomed by numerous industry participants – most notably the Managed Funds Association. Many have argued the amendment will bring transparency to an industry which has historically been criticised for being opaque.
The rules are expected to lead to hedge funds displaying more information on their company websites or even creating websites – a survey in 2011 by PR firm MHP Communications revealed 8% of managers still lacked a corporate website. This information will undoubtedly be of help to investors and regulators alike. Furthermore, the JOBS Act is likely to lead to more managers speaking to press and at conferences, which could lead to greater mainstream understanding of the alternatives industry and upend many misconceptions the broader public have of it.
However, some experts have warned the SEC has a substantial backlog of work and finalising the rules is likely to be subject to delays.