Picture this: Hedge Fund Manager X dresses up in his spiffiest suit, endures the ministrations of production assistants and makeup artists and stands before Bloomberg Television cameras to talk about his recent performance and pontificate on his favorite on markets and industries. A few minutes later, a news article contextualizing his remarks flashes across terminal screens, and a few minutes after that, the same news story hits the web, where the rabid lust for any tidbit with said money manager’s name attached gives birth to dozens of blog posts and hundreds of tweets. Maybe the market moves, maybe it doesn’t, maybe the thesis will prove correct.
Forget about those consequences for a moment. Instead picture Hedge Fund Manager Y, sitting at a souped-up trading desk, registering his rival’s publicity hit in some darkened recess of his reptile brain: Isn’t my track record longer than Manager X? he asks himself. Aren’t my ideas better, my assets under management more robust, not to mention I have spiffier suits and a stronger jaw. And then he picks up the phone and calls his publicist, who calls Bloomberg.
Believe us, it’s coming: Once-reclusive hedge fund managers are going to start going on the record with the press.
There’s been a fair amount of hand-wringing of late over the Securities and Exchange Commission’s rule-making on a JOBS Act mandate to lift restrictions on hedge fund marketing, and for good reason: Hedge funds will soon be able to say whatever they want to say, and not say whatever they don’t want to say, and whether that leads to more “accredited” Joes* dumping their savings into vehicles they don’t understand, or that the next Bernie Madoff promises outsized returns on the side of the Goodyear blimp, there’s plenty of cause for concern.
But there’s a clear win for all of us in allowing hedge fund managers the benefit of free speech: Some of them are going to use it. And when powerful investors—long cowered from discussing their results publicly by rules restricting private investment firms from general solicitation—put their names and faces on air and in print, they become a little more transparent and a little more accountable. There’s a lot of good in that.
There hasn’t been much coverage, but today marks the first day in court for Fairfax Financial, the Canadian firm suing broker-dealer Morgan Keegan and hedge fund Exis Capital Management for conspiring to drive down Fairfax’s stock. If you’re inclined to conspiracy theories, you should browse the complaint, or check what Overstock.com CEO (and leading hedge fund conspiracy theorist) Patrick Byrne has to say about Fairfax. Among the more explosive claims are that a Morgan Keegan analyst intentionally published false research about Fairfax, and shared said research with hedge fund clients before publication; and that an agent of Exis spread rumors about Fairfax, including that CEO Prem Watsa was on the run from the Canadian Mounties.
Depending on where you stand, the complaint may seem fantastical: Fairfax filed the civil RICO complaint in 2006, charging Steven Cohen’s SAC Capital, Jim Chanos’ Kynikos Associates and Dan Loeb’s Third Point with participating in a vast conspiracy. Those firms and others have been dismissed from the suit by New Jersey Superior Court Judge Stephan Hansbury, who said the deficiencies in the case against SAC Capital were “particularly glaring,”and that other defendants couldn’t be sued in his jurisdiction. Dismissals aside, Judge Hansbury saw enough merit—“There is no question that there was a campaign of negative information being circulated about Fairfax,” he said, per Bloomberg—to hear the case against Morgan Keegan and Exis.
Which is to say: It’s reasonable to believe that hedge funds sometimes do sneaky things. Which is not to say: Letting hedge fund managers spout off on TV is going to magically reform bad actors. On the other hand, current regulation forces private investment firms to secrecy, and it’s probably easier to behave badly when you’re used to operating in the shadows.
Meanwhile, the new rules are going to entice hedge funds to share more information, and in some cases, lure money managers into the public eye. And once you’ve gone on the air and shown the world what a brilliant and disciplined character you are, it’s a little bit harder to engage in the types of acts the Fairfax suit alleges.
After all, someone might call you on it.
*Individuals need $1 million in assets or $200,000 income in each of the last two years to invest in hedge funds, though the SEC is pretty laid back about how a firm ensures an investor is accredited.
The story has been edited to indicate that Judge Hansbury dismissed SAC Capital from the lawsuit on the basis of evidence, not on jurisdictional grounds.