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Hedge Fund Advertising: Opening Door to Investor Fraud?

Could a potential door for investment fraud be opening in the near future courtesy of the Jumpstart Our Business Startups (JOBS) Act? That very well may be the case unless the Securities and Exchange Commission (SEC) intervenes and comes up with new regulations to protect investors.

The JOBS Act was signed into law in April, with the idea to make it easier for small companies to raise capital. The law also allows private placements and hedge funds to advertise, for the first time, their products to the public.

As reported Dec. 4 by Bloomberg, the JOBS Act essentially means underperforming hedge funds can now market themselves with no serious restrictions or regulations regarding what they say or to whom they say it. In other words, some funds could easily tout themselves on the “airwaves, on websites and in the pages of the financial press to unsophisticated investors eager to get the same fabulous returns as the Wall Street elite,” the Bloomberg article said.

The potential risks to hedge-fund investors are considerable given the fact that the funds lack transparency, are extremely opaque and entail a compensation structure that encourages managers to bet big in order to claim their share of profits.

Moreover, many hedge funds hold thinly traded or illiquid investments, so investors are unable to easily withdraw their money.

The bottom line: Allowing hedge-fund advertising with no oversight attached does little to promote investor confidence in Wall Street. Indeed, it does the opposite.

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