KEYWORDS: advertising, affiliated funds, general solicitation, Hedge Fund Performance, Hedge Fund Regulation, hedge funds, India, inflows, Investment Company Act, JOBS Act, marketing, Mary Schapiro, mutual funds, qualified investor, SEC, Securities and Exchange Commission
Yan Lu, David K. Musto, Sugata Ray
Hedge funds are currently banned from advertising. New legislation contemplates lifting this ban, thus raising the question of whether the ban is good policy. We address this question by analyzing a form of indirect hedge fund advertising that already exists: advertising by institutions running both hedge funds and mutual funds, where the ads promote either the overall institution or specific mutual fund products. We find that institutions increase such advertising after hedge fund flows sag, and that such advertising predicts subsequent increased inflows for hedge funds. Thus, hedge funds’ flows appear to influence the decision to advertise, and the advertisements are effective in enticing new inflows to the hedge funds. Lifting the ban would level the playing field by allowing all hedge funds to advertise, rather than just those with mutual fund affiliates. However, in addition to increased net inflows, the ads are also followed by sub-par hedge fund returns after the advertising period, which is some evidence in support of the ban.