Hedge funds are a popular scapegoat for the ongoing financial Armageddon. But are they the real culprits or just easy targets for a misinformed press?
A group of industry insiders recently gathered at a conference in New York to address the issue of hedge funds’ unpopularity and how portfolio managers can better manage their reputations in the news media, while at the same time satisfy regulators that they are not marketing to unqualified investors.
One manager who is familiar with the intensity of the media’s spotlight is Phil Goldstein of Bulldog Investors. Goldstein, who successfully challenged the Securities and Exchange Commission’s hedge fund registration rule, said, “I don’t think anybody is saying, ‘Gee, if all of these hedge funds had registered, we wouldn’t be in this economic crisis.’”
Goldstein said that the media is quick to blame hedge funds whenever something goes wrong in the market such as the skyrocketing prices of oil over the summer. “But now that prices are coming down, I don’t hear anybody saying hedge funds have done a good job bringing down the price of oil,” he added.
Hedge fund public relations strategist Mitch Ackles said he gets a lot of calls from media outlets looking to point the finger at hedge funds every time there’s some market hiccup or movement in a specific stock.
“Clearly they weren’t [a great systematic risk] in this recent situation but it is the lack of understanding, which is fed because of the lack of information,” said Ackles. “And the lack of information is caused by the fear people have of communicating; they don’t want to be perceived as soliciting in any capacity. If hedge funds are able to communicate and open up the kimono a little bit, people might have a greater understanding and blame them a little less.”
Ackles added that he has clients who are advised by their wary legal counsel to not even disclose the fact that they’re hedge fund managers.
In general, the panel, which included Thompson Hine partner James Jalil, agreed that hedge funds should make it a point to talk to the media to help demystify the industry in the public’s eye. But, he warned managers to watch what they say, so as not to get themselves into trouble with regulators.
“They’re allowed to go on television and get quoted in The Wall Street Journal, but the vast majority of legal counsels that I’ve talked to have advised their clients not to say things that can be construed as solicitation,” said Ackles.
Panelists said that regulators interpret solicitation when managers talk about their strategies in detail and about their performances either in print, on-air or online. Goldstein, whose firm is currently being sued by Massachusettes for having a Web site that did not prequalify visitors before giving them information, said he’s challenging the lawsuit on First Amendment grounds.
“A friend of mine said, ‘I’m a connoisseur of porn and it’s a lot easier to get on those Web sites.’ Many laws have been struck down to prevent truthful advertising so that’s the basis of our challenge to the enforcement action that Secretary Galvin brought against us,” he said.
Goldstein predicts that if he wins this fight, it will revolutionize the entire issue of securities regulation, “because when you think about what securities regulations are, a lot of them are just restrictions on what people can say.”
Jalil, looking to clarify the SEC’s stance on advertising, said there really is no prohibition on hedge fund advertising, but there are significant restrictions on whom hedge funds can target.
“What the SEC would like for the industry to do is to have restrictions on access to hedge fund Web sites to only those to whom it is permissible, in the SEC’s point of view, to offer securities,” he said.
Hedge funds can sell to 35 non-accredited investors with no problems, continued Jalil, “so it’s not true that the average Joe the Plumber can’t buy hedge funds.” He said the industry has voluntarily limited itself to accredited money.
Goldstein countered that that makes the SEC’s gate even more irrational, because “now the SEC is saying you can take 35 unaccredited investors but not on the Web site.”
“From a practical sense, it’s ridiculous because an accredited investor, according to the SEC’s regime, can go on the Web site, get information, and then disseminate to the entire world on the Internet. How do you think they get all of these stories in the Journal? It’s the information age and you can’t keep it under wraps.”