Why hedge funds should engage in a major re-branding campaign to combat the unfair bias heaped upon them by the media and Congress. How does ‘Strategic Investment Pool’ suit you?

I’m not one to change my stripes to appease public opinion. But when bad PR prompts Congress to obstruct a perfectly legal, informed and voluntary industry, I have no qualms about defending the free market with spin.

Hated by many and understood by few, most hedge funds today are not even, literally, hedged. This is an industry in need of an extreme makeover...

The name “hedged fund” was coined by A.W. Jones, a late-blooming Australian immigrant who in his 40s developed a strategy for eliminating market risk by taking complementary positions. Selling some stocks short while buying others long, he built his portfolio to have equal total value, rendering market-wide moves in either direction a wash. He hedged his bets based on stock picking rather than market direction, thereby creating a win/win situation.

Today’s hedge funds are private-investment pools open to a limited number of accredited (savvy, rich) participants. These pools can invest in almost anything, which encourages creative management strategies unavailable to other, more regulated funds. That’s basically it. Although governed by the rules of private offerings, partnerships and LLCs, the term “hedge fund” actually has no legal definition.

Moreover, the name hardly describes the product. Today’s market presents a far different paradigm from Jones’s original theory. There are more managers chasing trades. Short-only pools have performed poorly because shorts are so hard to find. In 2006, few successful hedge funds were truly hedged because of the continuing difficulty creating alpha (a measurement of how much a short fund will decline in an up market) from a shorting strategy. As James Altucher wrote in last Tuesday’s Financial Times, “The Dedicated Short Bias Index of the CSFB/Tremont hedge fund index was negative in 2001... in a year with terrorist attacks, a dot com bust, a recession and negative returns in nearly every market index, the short sellers still couldn’t make money.”

So most of these pools, while claiming to be long/short, are mostly long - and therefore not “hedged.” Still the loaded term “hedge fund” remains and, regardless of reality, in the public perception lies the danger. According to a report by TNS Financial Services, there are an estimated 8.9 million US households with a net worth over $1 million, excluding primary residences. So why do so many (by definition) accredited investors fail to participate in these pools? Because the pools aren’t allowed to advertise, and they have a bad rap. If you listen to the vitriol spewed by mainstream media, hedge funds are the bane of financial markets. Wallowing in wealth, they draw on their power to exploit the market, thereby screwing the little guy. I’m surprised we haven’t yet heard House Financial Services Committee Chairman Barney Frank call them “hedge hogs.” But perhaps he fears a comparison...

Of course these pools are perfectly genuine, but to listen to Congress and MSNBC you’d think they were immoral. So what should the industry do? As David D’Alessandro says in his book, Career Warfare, branding is the key to long-term survival and leadership.

From Washington to William Shatner, scandals, failures and years of bad acting have been erased from memory through the clever art of re-branding. Re-branding has several benefits: Branding is image, and image creates opportunity, which smart managers then convert into value.

That’s good news for the industry. Because there is no legal definition of “hedge fund,” the industry is (until Congress passes more regulations) free to define itself. There’s no downside to their makeover. They don’t need to swallow the costs of recalling 30 million bottles of Tylenol. The bad news is that regulations prevent them from calling Madison Avenue, so their re-branding must be done themselves.

Some non-short managers will keep the moniker anyway for the aura surrounding it. But others may choose to accept every opportunity as a chance to publicize their new brand. Just because you can’t advertise doesn’t mean you aren’t doing it anyway. You advertise every time you open your mouth.

Interviews, articles, op/eds and conferences offer perfectly legal trickle-down PR conduits to those 8.9 million households about the accessibility of “Strategic Investment Pools” and the opportunities “Leveraged Investment Consortiums” offer baby boomers. Besides won’t all those hearings be far more entertaining with Ted Kennedy and Barney Frank pontificating on the evils of SIPs and LICs?

Heather Flick

1/26/07