Posts Tagged ‘Hedge Funds’

It’s taken more than six years after the beginning of the last financial crisis for the US to finally implement some of the regulations that became glaringly necessary when the financial system began to implode at that time. The Volcker Rule, along with Dodd-Frank legislation, are a start towards the kind of systemic regulation the financial system here requires to keep it in line.

Unfortunately, the regulations are too limited in scope to keep problems in the U.S. from reaching crisis proportions, let alone spreading overseas. As Gordon Brown points out in an Op-Ed in the New York Times, the lack of regulations to restrain global financial corporations operating overseas and markets in the developed and developing world all but ensures that we will visit Global Financial Crisis 2.0.

I wrote about this more than four years ago for the New York Society of Security Analysts in a piece entitled Mending the Seams: International Regulatory Reform. In the intervening years, a few things have changed, but not much. On a global basis, rules governing everything from systemic risk to derivatives to accounting standards to hedge funds vary widely as does enforcement of those rules.

Even if the rules were consistent, financial services companies can escape regulation by moving certain operations to different jurisdictions. There’s still the propensity of the right hand to have no clue what the left hand is doing, as alleged “rouge” traders engage in mind bogglingly risky behavior.

What is the scariest is the risks that we don’t even know about. The last crisis proved that the lack of foresight into risky activities was endemic, from the ones that seemed, in hindsight to be the most obvious, to other obscure risks that few even comprehended were risky.

If Bank of England economist David Miles is right, the next financial crisis will happen sooner than we think. He predicts one every seven years. It could happen, or not. The system could stumble along for another few years, fueled by loose money and a return to economic growth.

While the developed world and the global economy may be growing at a higher rate, one thing that hasn’t really changed is the lack of global stability. And that’s what’s going to come back to haunt us.

All bets are off in the race for financial services AUM in about five weeks, when hedge funds and private equity companies formally gain the right to market directly to potential clients. That’s when the provisions of the JOBS Act that lift the ban on hedge fund and private equity advertising become effective. These rules were formally approved about a month ago by the federal Securities and Exchange Commission.

There’s been a lot of speculation about exactly what hedge funds and private equity companies will do when they can advertise and market, which could be anything and everything including:

  • Celebrity endorsements
  • Billboards
  • National advertising campaigns
  • Direct mail and email solicitation
  • Fancy dinners, conferences and seminars

It’s all likely, but what hasn’t been discussed as much is the impact of the entrance of extremely well funded entities who are set up to compete with financial advisors, financial services companies and asset managers for a limited pool of high net worth, ultra high net worth and institutional assets. There’s a limited pool of these assets, and competition is already fierce among companies that have the right to directly market and advertise today.

Imagine what it’s going to be like in a few years when extremely well funded hedge funds really get their arms around what they can do and hire the brightest and the best Mad Men to formulate and execute a marketing strategy for them. While all healthy financial services firms have money to burn to a degree, hedge funds charge fees far in excess of what other asset managers can charge and they also have the ability to lock up AUM so that it can’t flow out in the same way that it does with mutual funds and financial advisors.

If you are currently seeking to gather AUM, you better watch out. These guys are coming and they have the ability to suck all the air out of the room so that there is even less space for other messages. In an already noisy atmosphere, it will be even harder for potential clients to distinguish your message from all the others out there.

That means if you don’t have a clearly defined ideal client type and a plan to attract those clients to you, you better get moving. Time’s a wasting…..