Capacity constraints in the hedge fund market make it unlikely that good managers would advertise their wares to the institutional market if the Securities and Exchange Commission adopts recommendations relaxing marketing restrictions.
Hedge funds have attracted trillions of dollars from the ultra-wealthy and an increasing number of institutional investors over the past few years, mainly by word-of-mouth. That grapevine means "there is far more demand than supply," said Denise Valentine, financial services analyst at Celent Communications LLC, a Boston consulting firm.
"People are looking for space in the best funds and coming up short when funds are closed. Hedge funds are a unique product…To find the right parties to invest with…has always been a matter of word-of-mouth. It's been extremely effective," she said.
"Advertising won't help this scenario as long as there is a shortage of capacity. As long as you have demand, word-of-mouth will do the deed."
The SEC released staff recommendations for changes after hearings in May on the U.S. hedge fund industry. One proposal was to lift restrictions on marketing and advertising of 3(c)(7) hedge funds. These are the largest hedge funds, which can accept investments from up to 499 "qualified purchasers," defined as institutions with assets of at least $25 million or individuals with assets of at least $5 million.