Hedge funds: Online all the time?

The Managed Funds Association now wants to see hedge fund advertising on the Internet.

The idea goes a step beyond the organization’s original plan to ask the Securities and Exchange Commission to let the unregulated industry run basic tombstone advertising for hedge funds.

Critics charge that the MFA is simply looking for a way to take the high-risk and very high-cost alternative investments to the masses.

But Patrick McCarty, the association’s general counsel, says that the MFA remains adamantly opposed to selling hedge funds to retail investors.

“The MFA doesn’t believe hedge funds are an appropriate investment for retail investors,” he says. “In fact, we think it’s a bad idea to sell hedge funds to retail investors.”

He adds that the MFA’s proposal will request more-flexible rules regarding marketing and promotion in exchange for greater restrictions on exactly who can invest in hedge funds.

Hedge funds are usually sold through private placements to institutions and rich people.

The MFA, a Washington trade group that represents much of the alternative-investment industry, including hedge funds, has yet to produce an official proposal. But its plan for increased marketing of alternatives continues to evolve internally.

“We’ve been going back and forth internally to decide where we want to be,” Mr. McCarty says. “We decided it probably makes more sense to give the SEC some more room to rule on this.”

According to the association’s preliminary proposal, the group is likely to ask the SEC to introduce higher investor-net-worth requirements for hedge funds that advertise. Specifically, the MFA wants to limit hedge funds to investors who can show a net worth of at least $5 million.

Most hedge funds currently require investors to have a net worth of at least $1 million.

The Investment Company Institute, the Washington trade group that represents the mutual fund industry, makes no bones about its opposition to the advertising and promotion of hedge funds.

“At the very least, it could be confusing to the public,” says John Collins, an ICI spokesman. “By allowing the chickens to appear with the hawks, it will be difficult for the public to distinguish one from another if they all look like poultry.”

In other words, Mr. Collins adds, the ICI is concerned that advertising might make it difficult for consumers to distinguish between a hedge fund – a product with limited regulatory oversight – and a mutual fund, one of the most regulated investment vehicles on the market.

For its part, the MFA maintains that advertising still is a long way from sales, and as long as retail-class investors are prohibited from purchasing hedge funds, there is no harm in looking.

Mr. McCarty compares the debate to visiting a library and having the right to read any book on the shelf.

“What’s wrong with letting people read an offering document?” he asks. “Who is being harmed by that?”

As private-investment vehicles that require investors to meet certain net-worth minimums, hedge funds are not only prohibited from general solicitation through advertising, but they are also required to pre-screen their website visitors for specific fund information.

The MFA contends that the rule limits the industry’s ability to attract investors.

“We think we should be able to make our information more readily available,” he says. “We think hedge fund websites should be open to the general public. If somebody wants to come to your site and look at this stuff, they will not be getting harmed in any way.”

As Mr. McCarty sees it, the ICI’s position is less about protecting the general public than it is about protecting the mutual fund industry.

“Of course the ICI is against this,” he says. “Just look at the performance of mutual funds over the last 18 months. It sucks.”

The SEC, for its part, remains on the sidelines, at least until a proposal is officially filed by the MFA.

An SEC spokesman, John Heine, points out that hedge funds, along with other private-investment pools, enjoy not being required to register with the commission, having met certain specific requirements.

“In order for hedge funds to maintain their status, they would need to avoid making a public offering,” he says. “As I understand it, the world of offerings divides into two halves – public offerings and private placements.”

some dissent

Not everyone, however, sees this as a black-and-white issue.

Kenneth Gerstein, a New York lawyer with Schulte Roth & Zabel LLP who specializes in hedge funds, believes that the widespread dissemination of information via the Internet is creating a fuzzy line between marketing and advertising.

“There are clearly problems and difficulties associated with hedge funds and their managers navigating around private-placement rules in the changed world of constant news stories and the proliferation of the Internet,” he says. “However, I’m not sure the MFA’s approach is the right way to approach these issues.”

Considering both the evolution of the way information is now delivered and the widespread growth of the hedge fund industry, many observers believe the future will offer more flexibility in terms of hedge fund advertising and promotion.

Burton Greenwald, a financial services industry analyst in Philadelphia, says that it was only about 20 years ago that the mutual funds industry was pleading its case to the SEC for the right to move beyond basic tombstone advertising.

“You’ve got to crawl before you can walk, and you walk before you run,” he says. “The SEC’s decision to move slowly is a reasonable one.”