Hedge Fund Marketing's Gray Area

by: Amit Chokshi, CFA

Bloomberg Markets Magazine is a fantastic publication providing in-depth coverage of a number of financial and economic topics. However, the latest issue is focused on hedge fund performance in 2009 and presents a gray area in terms of hedge fund marketing that favors larger, established players at the expense of smaller funds. Current regulations limit hedge fund marketing efforts including disclosing performance data but there seems to be a gray area that allows media outlets to serve as PR and marketing resources for larger hedge funds. The numerous databases that house hedge fund data along with the interest in quarterly letters of a number of managers makes it virtually impossible for hedge funds to control who gets access to performance data. Consequently, regulatory bodies should consider loosening the ability of hedge funds to release performance data to, at the very least, even the playing field between smaller and larger funds.

The latest issue of Bloomberg Markets Magazine covers the performance of large and mid-sized hedge funds in 2009 and features coverage of David Tepper's 117% return in 2009. While Tepper certainly doesn't need any marketing assistance and an extra $500MM in his fund won't make or break him, the point is that Tepper is allowed to essentially market his fund through this publication. A number of other hedge funds have their performance data reported in this magazine's feature article. In contrast, a fund manager that generated returns superior to Tepper's but runs a small fund would be restricted from broadcasting specific performance figures. This is a bit of a loophole that regulatory bodies should address.

Another issue is that investors enjoy reading quarterly letters of hedge fund managers and seek those out although direct distribution of these letters is restricted. However, fund managers submit performance data, including letters, to numerous investors, hedge fund databases, marketers, and potential qualified investors. Therefore it's extremely difficult to control where this information ultimately ends up and oftentimes a number of manager letters can be found posted on various sites such as Sribd. Letters from managers like David Einhorn of Greenlight Capital are highly prized and good reads and - like Tepper - Einhorn is not hurting in terms of capital raising efforts. However, as with the media outlet issue, these loopholes create an unfair advantage that favors the larger funds that already enjoy significant advantages over smaller firms with respect to the ability to raise capital.

Upton Sinclair was known for saying "It is difficult to get a man to understand something when his job depends on him not understanding it". Perhaps that is what's occurring in my thought process but I have a difficult time seeing why the SEC and other regulatory bodies establish restrictions regarding performance reporting and even broader marketing efforts when strict enforcement is highly impractical. For example, a hedge fund manager can run the same strategy in a managed account and if there is no performance allocation and the fund is managed through a registered investment adviser, the manager has far fewer restrictions with respect to marketing that strategy. While regulatory bodies and hedge fund managers may be better served with stricter marketing rules (as regulation could increase operating costs for smaller hedge funds), perhaps loosening the ability of funds to report performance data should be considered to at least allow smaller funds to be on more equal footing with the larger hedge funds.