Hedge funds must face up to their PR crisis

You know you have an image problem when President Obama publicly excoriates you. Obama, who is happy to shake hands with Hugo Chavez and reach out to the mullahs in Iran, does not however stand with US hedge funds. By publicly lambasting the senior bondholders of Chrysler debt, the President shows that the victims and perpetrators of the financial crisis have become confused in government eyes. Hedge funds didn’t cause the crisis nor has any been bailed out with public money. Indeed hedge funds and their founders have almost certainly lost more money as a result of what has happened than any single other group; and certainly in greater concentrations. Nevertheless the public is at least deeply suspicious if not outright hostile to the hedge fund industry.

It is not just in the US. In Europe regulators, politicians and the public are eager to go after the hedge funds. Paul Marshall of Marshall Wace recently wrote a column in the FT over the proposed European Union directive on regulating the alternative asset management industry. It was a plaintive cry that will probably not be heard. He argues cogently that regulators are going after the wrong guys and in the wrong way, which is entirely true.

At the root of this problem is the hedge funds’ hard wired secrecy. They have made opacity part of their business plan. In good times this served them well as it cloaked them with mystique. But their lack of openness is now a real problem and one which will take a wholesale shift of attitude to repair.

Some hedge funds get it. Within New York headhunting circles, almost the only hedge fund search mandates are for marketing people who can communicate professionally not only with investors, but also with the wider group of stakeholders, including government officials, regulators and the press. Few funds have actually made the jump and hired someone who can open the kimono, although many are thinking of it.

The hedgies might want to look at the private equity industry which two years ago was facing its own PR nightmare. Widely blamed for job losses and asset stripping, private equity firms were famously called locusts by the German finance minister. In response they went on a charm offensive. Industry bodies lobbied hard and individual firms hired seasoned PR vets, used to working in the trenches of crisis response and image building. It was no surprise that one day after Steve Schwarzman was vilified for the extravagance of his 60th birthday party, Blackstone called up Goldman’s head of press relations Peter Rose and asked him to join them. Other mavens soon went in house; KKR hired Ken Mehlmann who had run the Republican Party in the US and Peter McKillop (a senior PR from JPMorgan and ex-journalist). More recently Actis in the UK hired Tashi Lasalle (recently voted one of Management Todays 30 rising stars).

As they come blinking into the sunlight of public scrutiny, hedge funds should take a leaf out of this book. The odd op-ed in the FT is not enough.