US Hedge Funds Will Be Allowed To Advertise

by Carla Johnson, Investors Offshore, London

15 January 2002

The ban on hedge fund advertising in the US, which dates from 1940, may be swept aside by the SEC, which is poised to allow at any rate simple 'tombstone' ads in print and on the Internet announcing the existence of such funds and other riskier instruments, which issuers can currently advertise only to so-called 'sophisticated' investors, meaning in practice, rich ones.

The SEC has not explicitly said the proposed rules would apply to 3(c)7 and 3(c)1 offerings, which are the private placements usually used to raise money for hedge funds, but it is consistent with their general direction. And the new rules are to some extent a result of prolonged lobbying by hedge fund associations.

The Managed Funds Association, for instance, last May sent a letter to the SEC arguing that hedge funds should be allowed to advertise. The association suggested that hedge funds should be allowed to post simple tombstone advertisements detailing a hedge fund's name, investment style, how much money it intends to raise, a contact number and a disclaimer explaining that the fund is open only to qualified investors.

Advocates of hedge-fund advertising say that no matter who sees the ads, only sophisticated investors will be allowed to invest in the funds. There is little chance, therefore, that small investors will be exposed to unacceptable levels of risk.

As might be expected, the mutual fund industry (whose results last year were far worse than supposedly riskier hedge funds) is anxious about any erosion of the regulatory restrictions on hedge fund offerings. Mutual fund leaders have lobbied hard with the SEC for curbs on advertising to be maintained - but it looks as if they have been unsuccessful.

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