Will Hedge Fund Advertising Ruin Wall Street?
By Staff News & Analysis - September 07, 2012

When hedge funds advertise … Jesse Eisinger, today, joins Matt Levine in worrying about the effects of allowing hedge funds to advertise. The all-but-certain consequence is that while the handful of excellent hedge funds will remain highly secretive, a bunch of much less savory characters will start hitting the airwaves with gusto. As Jesse says, "Jacoby & Meyers advertises on television; Sullivan & Cromwell does not." … The big problem here is that we seem to be going from one extreme to the other: while the restrictions on what hedge funds can say in public have historically been too strict, they're now going to be far too loose. As Levine notes, hedge funds will be able to basically say anything they like about their funds, while omitting anything they want to omit at the same time. – Reuters

Dominant Social Theme: Once hedge funds advertise, investors may lose money.

Free-Market Analysis: Parts of the blogosphere are in full cry over allowing hedge funds to advertise. The idea is that hedge fund managers will overpromise and under-deliver.

Over at Reuters, columnist Felix Salmon worries that regs are going from "one extreme to the other." All along we learn hedge funds restrictions have been "too strict. Now they're now going to be worrisomely expansive."

He quotes another worried financial columnist, Matt Levine, who characterizes upcoming legislation as giving fund managers the go-ahead to say anything they want "while omitting anything they want to omit."

Salmon mentions another columnist who is concerned over at ProPublica. This is Jesse Eisinger, who has written an article explaining that loosening marketing constraints will turn hedge funds into Ginsu knives. Eisinger is concerned that the SEC is returning to "a precrisis specialty." He characterizes that specialty as, "get rid of supposedly outdated regulation, but create no new limits or powers to keep things from blowing up."

Over at Deal Breaker, Matt Levine makes the following three points:

Soon you will be able to:

  • say whatever you want about your hedge fund, and
  • not say whatever you don't want to say about it, as long as you
  • take reasonable steps to actually sell it only to accredited investors.

Levine is pretty scathing, actually. He adds:

Doesn't this feel a little like the SEC saying "okay, Congress, you want lots of fraud, here you go, enjoy your fraud"? Selling to "accredited investors" sounds pretty good because it sort of sounds like you have to pass a test, but of course you don't: you just need to be a moderately successful dentist or interior designer.

And now those people will have a lot more access to unaudited investment opportunities that are not publicly filed or reviewed by the SEC. I suspect they'll have a lot of opportunities to choose from. Make sure yours stands out.

Over at Reuters, Salmon is concerned as well, though his column is a little bit less apocalyptic. Nonetheless, he writes:

It's very hard to see how any good can come of this. Picking a hedge fund (or, in Scaramucci's case, a fund-of-funds) is hard – much harder, actually, than picking a mutual fund, and that's difficult enough. It's almost impossible that advertising from individual funds will be helpful rather than unhelpful in this respect.

That said, the SEC is dragging its feet here — the new rules were meant to be in place in June — and it's really not the main culprit: Congress has mandated that these changes be made, and the SEC can't just ignore one of the few bills to pass with genuine bipartisan support.

It could, however, put in place a series of hoops that any hedge fund would have to jump through before being allowed to advertise. It could require that all ads be run by the SEC first, for instance, and it might also restrict the kind of places that hedge funds can advertise. It could even, if it wanted, force all advertisements to be in print form, with lengthy disclosures a bit like the ones you see in pharmaceutical ads.

But the SEC didn't do any of that: it's basically washing its hands of the whole issue, and saying that if Congress wants hedge-fund ads, then Congress is going to get hedge-fund ads. It's quite a passive-aggressive stance, actually.

Eisinger says, "the best-case scenario from the agency's move is a bunch of Paulsons," with investors buying in at the top and selling at the bottom, "while the worst-case is a bunch of Madoffs."

It's a bit surprising to see these columnists and others so concerned that investors are going to be subject to terrible losses from hedge funds if the SEC doesn't continue to protect them. Of course, the SEC by statute doesn't PROTECT anybody.

The SEC is built around disclosure, the idea that if investments are revealed thoroughly in writing that people can make up their own minds about the potential benefits and pitfalls. The SEC was set up in the 1930s, in reaction to the stock market crash in the US in 1929.

The idea was that investors had been sold bad investments and that government needed to step in and compel the market to tell the truth. But in the case of the SEC and all the other regulatory "advancements" that were made in the 1930s, there was one big problem: The governmental agencies behind the reformation were not telling the truth about the reason for the 1929 crash.

What actually happened was that the newly formed Federal Reserve apparently illegally printed more money than it was allowed to based on the agree-upon paper gold ratio. The additional money flooded the market and caused first the Roaring 20s and then the crash itself.

While we used to believe that this was merely greed and blundering, today – as a result of our discoveries about directed history – we are much more apt to wonder if this was part of some sort of deliberate power elite plan to ruin the world's economy in order to promote world government.

Monopoly fiat central banking itself is inevitably ruinous, and the powers-that-be must know this. They know the process expands the money supply and then contracts it. As Money Power controls central banks and money center banks, there is nothing that stops those in charge from giving a bit of help to the process via concerted credit tightening.

Those inclined to do a bit of historical research ought to look up Ben Bernanke's handling of interest rates in the early and mid-2000s. There was apparently a bout of little-commented-on "tightening."

You won't find the columnists commenting on loose money and its role in the great financial crisis of 2008. You won't find these columnists explaining that it was illegal actions of the Fed that caused the crash of 1929. Or that the rationale for creating the regulatory regime that has run the US securities industry since the mid-1930s was built on a lie.

The entire regulatory dialogue of the 20th and now the 21st century is built on one untruth after another. The business of regulation, for instance, is the business of industry. Regulators often seek to work in the industries they supposedly regulate. It's called "regulatory capture."

These columnists along with many others are seemingly eager to advocate restraints of speech – censorship really – for industry players. Would they be so quick to advocate similar censorship for themselves? And why don't they do rudimentary financial history research to find out how financial regulation actually came to be and what a fraud it often is?

The power elite that seeks to run the world has turned the modern era into one of regulatory democracy. Money Power exists above regulatory authority and therefore regulations are merely a way of squeezing out the competition. As John D. Rockefeller reportedly said, "Competition is a sin."

After Thoughts

One waits in vain for financial literacy to invade punditry.

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