INTERVIEW: Forget Doritos And Beer, Next Year's Super Bowl Ads Might Be Hedge Funds

Eliane Chavagnon

8 July 2013

As reported last week, the Securities and Exchange Commission will on Wednesday vote to lift - as required by the 2012 Jumpstart Our Business Startups Act - an 80-year-old ban that bars the general solicitation and advertising in certain private securities offerings.

Hedge funds will only be able to accept funds from “accredited” investors with a net worth of at least $1 million, or who earn at least $200,000 a year, but critics argue that removing the advertising ban will expose small and/or inexperienced investors to fraud as a result of loosened investment protections.

However, it will also serve to “flatten the playing field,” says April Rudin, chief executive and founder, The Rudin Group.

“Larger funds typically sell on track record and return, so I think what this new provision will do is to flatten the playing field between larger, more established funds, and smaller emerging funds,” she said.

Opening the advertising gates

Under the Securities Act of 1933, hedge funds are in the Regulation D category, deemed “risky” investments. The aim of the Act, established after the stock market crash and during the Great Depression in the US, was to essentially protect investors from themselves.

“The notion was that, unless people had enough money to lose, they would be banned from being able to invest and make these ‘risky’ investments,” Rudin said.

For years, hedge funds and other Regulation D investments relied on a system called “cap intro,” whereby investors would be introduced to such a vehicle via an accountant or attorney, who would in turn “accredit” them.

Rudin cited Bernard Madoff as an example of the impact this has had on the US, saying it was the “scarcity” and “closed-ness” which made people want to be part of his funds.

“I think that has set the landscape in the US for how people view accredited investors. It’s been an undercurrent of people that are referring others to these particular investments,” she said.

And for this reason, it could be perceived as a somewhat “disparate” law.

“Someone like Kim Kardashian who has lost tonnes of money in private equity deals and has many advisors...has access to these investments as an accredited investor, while some smart hedge fund manager, investment banker or younger person - who is just starting out and who may have a degree in finance - does understand, but isn’t allowed,” Rudin said.

She believes a further shift in landscape is likely if hedge funds are given the green light to advertise, with marketing to the next generation of investors being one particular area worth acknowledging.

Emerging investors won’t be interested in a hedge fund with a complicated strategy that they don’t understand - especially at a time when advertising extends itself into social media and the internet, among other growing channels, Rudin said.

“Smaller funds will have a new opportunity as the playing field gets leveled; they’ll be able to use platforms like social media, which are not expensive, and affinity groups and communities where high net worth investors and next-geners will find them,” Rudin continued.

She added: “From the standpoint of brand-building, you want to be able to explain your investment strategy in a clear, easy way - you can’t have a 45-minute infomercial.”

An opportunity?

Another major impact is apparent when thinking about the change in the advertisement of prescription drugs.

Rudin explained: “First, manufacturers were only able to advertise to dispensing physicians, and then later allowed to directly market to consumers. This meant that patients who once relied on professional advice now could ‘diagnose themselves’ and start asking for a prescription drug by name. ‘I can’t sleep, patients now say. ‘I need Ambien.’ Now, potentially, your clients will call you and bypass your advice and demand to be invested in a particular hedge fund, the advertisement of which has caught their eye.”

She noted that it is “crazy” how so few family offices and wealth managers have actually told any of their clients about the looming reform.

“Because people have said they didn’t know it was a law, thinking ‘it hasn’t been passed’ or ‘it’ll never happen’…There has been much burying of heads in the sand,” Rudin said, adding that the call to action now is to communicate with clients ahead of time to let them know these ads are coming.

“Potentially, I see that during the 2014 Super Bowl instead of Doritos and beer ads, it could be hedge funds,” she quipped. “However, just because they can do it, it doesn’t mean they can do it right or do it well - and that’s another big opportunity.”