The Securities and Exchange Commission voted today to allow hedge funds and other private investment firms to start publicly advertising for investor dollars, something that has been strictly off-limits since the 1930’s. With this change, firms will no longer have to limit their fund raising to direct contacts with a limited pool of qualified, high net-worth investors. The new rules are set to go into effect in October.
Given the struggles that energy and commodity hedge funds have faced since the crash of 2007, it’s interesting to contemplate if the rules will have a substantial impact on the growth of the segment. Commodities have, of course, always been considered a high-risk investment and any prospectus for these types of funds have always carried that disclaimer. Given that energy commodity prices, particularly in the US, have been pretty much been wandering without sustained momentum either up or down and with low volatility, the high worth individual investors and institutions haven’t necessarily been throwing money at these funds lately. With this change, are we going to see an energy hedge fund put up a billboard on the highway or send out a mass junk mailing and tap into a new pool of investors that has been previously out of its reach? Time will tell, but given that hedge funds still can’t take money from investors with less than a $1 million net worth, it hard to imagine that there will be a substantial influx of dollars coming from a billboard or a snappy ad on cable tv.
Until there is substantial and lasting economic growth that increases demand for commodities, both energy and non-energy, and in-turn provides more interesting price environment for hedge funds to operate and generate profits, it seems unlikely to me that this rule change, on its own, will lead to any significant growth in the hedge fund market.