(Originally published here.)
The U.S. Securities and Exchange Commission ruled yesterday that it is no longer illegal for hedge funds and other private investment firms to solicit the public for capital by advertising. Contrary to some scaremongers, this is a welcome development. (It is also an inevitable consequence of the so-called JOBS Act, which is supposed to make it easier for smaller companies to raise money by reducing what they need to disclose to prospective investors.)
Opponents of the change worry that savers will be more vulnerable to scams. One argument is that fraudsters in the mold of Bernie Madoff will be empowered by their new-found ability to buy full-page ads and television spots. I don’t think that’s a big deal. As Dealbreaker’s Matt Levine points out, it’s pretty easy to avoid scoundrels by sticking to index funds. Moreover, as I argued in a slightly different context, only the greedy get fleeced by offers that are too good to be true.
Another, better, argument, is that regular people — even relatively rich people — shouldn’t be putting their savings into risky products that charge high fees. According to this logic, hedge funds and other private companies looking to raise capital aren’t fraudsters who literally take your money and run, but subtler scammers who charge a lot of money for bad products.
That wouldn’t make hedge funds unique, however. Most finance academics advise parking your savings in simple index funds that charge minimal fees. Instead, people allocate trillions of dollars to the mutual fund industry, which has been ripping off investors with high fees and subpar performance for decades. Fittingly, the Investment Company Institute, a trade body, is up in arms over the rule change. Maybe they don’t want to deal with the competition.
(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)