Alternative Investment Management Association
Walek & Associates
The 5 April 2012 signing by President Obama of the Jumpstart Our Business Startups (JOBS) Act has the potential to reshape the hedge fund landscape. The JOBS Act eliminates certain restrictions on capital formation to spark economic growth in the US. According to a recent Client Advisory from Katten Muchin Rosenman LLP: “The JOBS Act significantly expands the options that issuers (including both operating companies and investment funds) have to raise capital without registering their securities under the Securities Act of 1933 (The Securities Act). Such issuers can now engage in general solicitation and use general advertisements when selling to accredited investors under Regulation D, so long as they take ‘reasonable steps’ to ensure that all purchasers are accredited investors.”
By removing restrictions and grey areas concerning marketing, sales and communications by hedge funds, the JOBS Act will completely change hedge fund marketing. It will usher in a new era of competition and growth for hedge funds and it has the potential to fundamentally change how hedge fund management firms are structured and how they and the funds they manage are perceived in the marketplace. Executives at hedge fund management companies, as well as traditional asset managers, are beginning to take notice and changes are underway.
Hedge fund executives need to do three things now:
1) Understand the JOBS Act and what it allows;
2) Acknowledge that, no matter what any individual firm does or does not do in response to the JOBS Act, industry practices and the industry itself will change in the months and years ahead; and
3) Begin discussions and analysis to determine the best course of action for your own organization in anticipation of these changes.
This article addresses each of these areas.
While the JOBS Act was signed in April, its full impact on the marketing of hedge funds depends on the outcome of the current Securities and Exchange Commission’s 90-day review of the proposed changes to existing laws that prohibit public communications about hedge funds. It will likely take a bit longer. Title II of the JOBS Act removes the so-called ban on general solicitation of investors in private funds through advertising and other means. Specifically, hedge fund managers will be allowed to:
• Post information about specific funds on publicly accessible websites;
• Develop more specific and direct advertisements on investment vehicles;
• Conduct direct solicitation of potential investors;
• Increase on-the-record communication with the media;
• Expand social media campaigns and channels;
• Deliver public speeches and one-on-one presentations with a wider assortment of professionals; and
• Engage in product promotion and sponsorship opportunities at public events.
From what we see today, the impact of the JOBS Act on hedge funds will be similar to the game-changing impact of the 1986 Big Bang deregulation of the London financial markets or the 1977 U.S. Supreme Court decision allowing lawyers to advertise their services. Hedge fund advertisements in The Wall Street Journal, CNBC, Pensions & Investments. Talking more freely to the media about hedge funds and their strategies. New product launches. Unlocking web sites. Direct mail to high-net-worth individuals. Online professional networking. Profile articles in mainstream media. Naming rights to sports arenas and golf tournaments. These are among the doors that will be opened to hedge funds. Will every hedge fund manager use these tools? No. But all these tools and others will be used.
Firms of all sizes and strategies are already starting to plan for the JOBS Act world. We are regularly having conversations and receiving inquiries from CEOs, COOs, and investor relations officers at hedge funds large and small trying to figure out what to do in this new environment. One recent example is telling. We received a call from a self-described very conservative firm that has never before engaged marketing communications. Now, looking at the JOBS Act, they are considering making more information publicly available via their website and building a media profile.
Coupled with the Dodd-Frank Act’s requirement for most hedge fund managers to register with the SEC, the JOBS Act will accelerate a trend towards openness and transparency that has been building in the hedge fund community for some time. In this context, the JOBS Act might be seen as merely a codification of an emerged reality. That is, many managers have already embraced marketing and marketing communications. But the JOBS Act kicks the ball further down the field, providing new, powerful opportunities – as well as challenges.
One challenge is that while the JOBS Act will likely remove some obstacles to communications, limits remain. According to John H. Roth, Counsel and CCO of Venor Capital Management LP, “Hedge fund managers, whether or not SEC registered investment advisers, are subject to the anti-fraud rule of the Investment Advisers Act. Therefore, for example, communications by managers about a hedge fund’s strategy or performance cannot be false or misleading. Managers will also need to be wary of discussing specific fund investments due to market manipulation concerns.”
So what is a hedge fund manager executive to do? Run an ad in Barron’s or Institutional Investor? Take a reporter to lunch? Not so fast.
What the JOBS Act does is open doors and make certain tools available. But those tools are tactical, not strategic. Fund management executives must start with the concepts of brand, messaging, targeting and strategy to determine what, if any, of the soon-to-be JOBS Act allowed marketing and communications tools to work for their own business goals. For others simply sharpening messages and raising visibility might be enough.
Building a brand doesn’t happen overnight, but the JOBS Act offers managers a chance to think about their firm’s and fund’s brand and then utilize new avenues for sculpting it.
What is a brand? A brand is a name that stands for something positive in a prospective client’s mind. “Volvo” means “safety”. “BMW” means “driving”. For hedge funds, the question is – “What do you mean?”
Brand doesn’t mean performance. The biggest brands are not necessarily the best performers. None of the billion-dollar hedge fund money raisers listed by Kathy Burton of Bloomberg in a November 2011 article that year were to be found on the year’s top performer lists.
Brand matters as institutional investors, the increasingly dominant buyers of alternatives, send the overwhelming majority of fund flows to established brands. It takes more than performance to attract investors: visibility, differentiation and credibility are important watchwords of the industry. Given an equally perceived ability to deliver returns, investors require hedge fund managers to have a strong culture of business management and a healthy reputation. An AR Magazine piece this year said: “The barriers to entry are higher than ever as investors are placing more demands on hedge fund managers to build a credible platform from day one.”
As you consider your brand and your market position, think about what you want to be known for. It starts with what you do best and how you want to grow – a narrow focus, a global strategy, a fund family, etc. With a strong, resonant brand, managers can compete in a crowded marketplace, diversify their marketing beyond performance numbers and build business for the long term.
Maybe you want to build a brand platform for the growth of your funds. Maybe you want a bit more visibility on your website and in a few select media articles. Maybe you want to continue to keep a low profile.
In today’s highly competitive marketplace, hedge fund managers need to sharpen their marketing and positioning messages to cut through the clutter and give investors and potential investors a clear understanding of who you are, what you do, and how an investment in your fund is a better alternative. And that sharp messaging needs to play out in decks, websites, presentations, collateral materials, search engine results and media.
Accepting that the JOBS Act is a watershed event for hedge fund marketing, where will it lead over time? Some likely macro possibilities to consider:
A Bigger Industry
The global hedge fund industry is more than $2 trillion AUM and it’s accomplished this with its marketing hand tied behind its back. As branding and marketing gather steam, it will increase visibility, transparency and understanding of the industry and its participants. New marketing savvy players will enter the business and assets will grow. While this growth could lead to bad actors entering the market for nefarious purposes, the ability of respectable managers to more freely communicate with the public will become even more important.
Competition is already tough for asset-raising. It will get tougher. Hedge fund managers will need to sharpen their brand and marketing to be focused and compelling as competition increases within sector and from new outside participants. Traditional, long-focused firms will increasingly encroach on the sector with new strategies and products and proven marketing expertise, raising the bar for everyone.
Hedge Fund CMO
As marketing gains importance, it will demand a larger role in the hedge fund management structure. Chief marketing officers at hedge fund management companies are few today; most of this function is handled by the CEO, COO or investor relations. Hedge fund CMOs will be increasingly common, especially at mid-sized and larger firms. Internal promotions will satisfy some of this new demand. Outsourced CMOs may become popular, as will crossover CMOs from traditional firms to alternative firms.
Manufacturing, Meet Distribution
Look for combinations that combine firms with brands/products with established sales and marketing expertise. It’s happening already between hedge funds, between hedge funds and private equity, and between hedge funds and more traditional firms.
Coming at a time when institutions and high-net-worth investors need investment strategies sophisticated enough to meet the dual challenges of underfunded savings and volatile markets, when the hedge fund industry has achieved record assets, and when the divide between long-only and alternative managers is crumbling, the JOBS Act – pending SEC comments – takes the risk off by permitting the use of powerful, effective marketing communications tools to build hedge fund brands, promote products, and expand businesses.
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