Imagine trying to run a business where (1) over 90% of the population can’t legally be a customer AND (2) you’re not allowed to advertise. And, no, you’re not selling products that kill people.
In the world of hedge funds, this is a reality. But the SEC is now considering lifting that ban.
According to a recent article by the Associated Press, the SEC voted 4-1 to seek public comment on the proposal. After 30 days, the SEC will likely put it to a final vote. Of course, hedge funds would still be restricted to clients who are “accredited investors”, i.e. those with net worths over $1 million (excluding their primary residences) or those generally making more than $200K per year.
Not surprisingly, many in government and the mutual fund industry oppose the measure.
I, for one, think that hedge funds should be allowed to advertise (along with any other business, for that matter). Hedge funds can be a great way for investors to reduce risk, since fund managers are allowed to short stocks or use derivatives. But investors need to be careful, because not all hedge funds “hedge” anymore. Some operate more like one-way leveraged funds, which can make them ticking time bombs.
But keep in mind that no hedge fund received a bailout in 2008, and no hedge fund failures have ever posed systemic risks to the larger economy.
Whether you agree with the SEC’s proposal or not, this should at least dispel the myth that hedge funds are largely “unregulated”.
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