The prohibition against the marketing of hedge funds has lost some of its teeth with the advent of Web sites that publish hedge fund manager data.
The new Web sites, coupled with looser federal restrictions on who can invest in hedge funds, is easing the process of managers and qualified investors finding each other, and might be pushing hedge funds closer to the investment mainstream.
But while some see these moves as signs the Securities and Exchange Commission is easing up on hedge fund limitations, the SEC says the Web site move is strictly within existing law.
At least three Web sites have been created to disseminate hedge fund information, such as investment style and performance, with more likely to follow. (A hedge fund is a private investment partnership, with less liquidity than typical regulated funds and with much wider investment latitude, including the use of leverage and short selling).
The first of many?
Through a no-action letter issued in May, the SEC allowed Lamp Technologies Inc., Dallas, to publish hedge fund manager information on the Internet.
Users of the restricted site, www.hedgescan.com, are screened, and Lamp charges $500 per month to subscribers for unlimited use.
Executives for Sierra Partners L.L.C., Glen Cove, N.Y., then sought their own no-action letter, thinking their plan to offer a free Web site, www.hedgefund.net, might disqualify it under the terms of the Lamp letter.
But in telephone discussions, SEC officials said Sierra's situation fit into Lamp's, and another no-action letter wasn't required.
The subscription fee Lamp charges was not a key issue in the SEC's letter; the screening was.
Some hedge fund industry experts say the Lamp effort, and expected competing Web sites, will lead managers a step closer to marketing their hedge funds, albeit to qualified investors only.
But SEC officials, as well as some hedge fund industry experts, view the Lamp letter as being consistent with past SEC rulings on the dissemination of hedge fund information.
SEC officials can say they aren't getting looser with the marketing prohibition, said hedge fund attorney Steven Fredman, "but I think it's an amazing thing that you can do this." Mr. Fredman is a partner with Schulte Roth & Zabel L.L.P., New York.
While there is a gatekeeper preventing non-accredited investors from perusing the manager data, the hedge fund manager himself has little control over who is viewing the information, Mr. Fredman said.
That is a change from traditional interpretations of the law, he noted.
"You get something that's almost equivalent to the prospectus," said William Michaelcheck, chairman of New York-based Mariner Partners, which manages a hedge fund and assists others with hedge fund manager selection.
Mariner subscribes to the Lamp Technologies site.
"It's much more useful" than traditional paper-based hedge fund publications, Mr. Michaelcheck said.
No change in policy
Officials for the SEC do not view the Lamp letter as a more accommodative policy, but as an application of existing law on a new technology.
"It's a way for them (hedge funds) to use technology without crossing the line into general solicitation or a public offering," said Doug Scheidt, associate director and chief counsel in the SEC's division of investment management.
"The Lamp letter was a proposal to provide information on hedge funds, but not to the whole world," he said.
Likewise, Paul McKean, executive vice president with LJH Alternative Investment Advisors, Naples, Fla., said the data contained in hedge fund sites are not that much different from existing services offering hedge fund performance data, typically on paper.
"In a sense, these (sites) are just electronic delivery of the same information," Mr. McKean said.
And the president of Lamp Technologies, Aladin Abughasaleh, said he agrees that the SEC's stance has not changed. He said the site does not represent a loosening of the restriction against private partnerships advertising.
Hedge fund advertising and other forms of marketing is restricted in order to maintain the partnerships' status as private, thus prevent the general public from using the largely unregulated vehicles.
An accredited investor must be an institution that among other things meets certain size requirements, or an individual with specific asset and income requirements.
Variety of data
The Lamp site contains data on more than 400 investment managers, and continues to add more, Mr. Abughasaleh said. "The response has been just overwhelming," he said.
Sierra's site has data on about 60 funds, and charges the funds themselves a fee to participate. Sierra charges $250 initially and $100 per month to managers on the site, said Alex Shogrun, co-founder and managing partner of Sierra.
Sierra's Web site includes performance data, as well as descriptive text of the manager and its investment process.
Sierra also is attempting to put together a fund of funds, focusing solely on market-neutral hedge fund managers, he said.
The publishers of a third Web site, www.altvest.com, reportedly of non-U.S.-based hedge funds, could not be reached.
In making information on hedge funds more readily available, the Web might be pushing hedge funds closer to broad institutional investor acceptance.
"Hedge funds seem to be moving more toward the mainstream of asset classes," said Mariner's Mr. Michaelcheck. It appears to me, the whole idea of hedge funds is becoming a socially acceptable, 'PC' thing to talk about."
Joseph Nicholas, president of Hedge Fund Research L.L.C., Chicago, said the use of the Web for disseminating information is a good thing, given the historical regulatory barriers to the free flow of hedge fund data.
Mr. Nicholas said he applauds the Web sites, even though they are a form of competition to his firm, which publishes and sells hedge fund style and performance data. HFR will be selling its own type of Web-based service next year through a subsidiary, Investment Technology Inc.
