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Beware of that hedge fund in the window

May 23, 2013: 3:29 PM ET

hedge_fund_adsWhen hedge fund managers advertise, performance dips.

FORTUNE -- Hedge funds soon will be allowed to advertise their wares to potential clients, thanks to a provision in last year's JOBS Act (which had no direct relation to actual jobs). As will private equity funds, venture capital funds and other alternative investment vehicles that heretofore were prohibited from general solicitation.

Former SEC Commissioner Mary Shapiro opposed the change, so she basically sat on it (apparently believing her personal opinion trumped the directive of federal legislation). New SEC Commissioner Mary Jo White has suggested that she'll move this and other JOBS Act provisions along shortly.

So in a few months expect the pages of your favorite financial rag and website to contain advertisements for investment opportunities that you probably can't afford (since you'll still need to be an "accredited investor" to actually participate). For the 1%, however, a word of warning: Future performance is likely to be worse than past performance.

That's the finding of a new academic paper that examined the results of mutual fund advertising by companies also manage hedge funds. These advertisements don't specifically mention the hedge funds -- that still would be illegal under current law -- but they do compel wealthy individuals to ring the parent organization, which then does a classic up-sell.

The researchers learned that such advertisements generally follow a lull of hedge fund inflows, and result in a monthly bump of 0.5%. Not too shabby, considering that they were technically advertising for something else.

At the same time, however, the researchers found that monthly hedge fund performance post-advertisement fell by 0.1%. There isn't a specific explanation for the post-advertising performance dip, except perhaps that performance is negatively correlated to inflows (something that venture capital and private equity firms often talk about).

To be sure, a 0.1% decrease is not the end of an investor's world -- particularly if we're talking about a fund that had strong performance to begin with. But it also means that when these opportunities become more widespread, investors should consider that they'll likely be paying full price for items that ultimately will be discounted.

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About This Author
Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

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