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As the SEC considers a proposal to raise the minimum liquid net worth for hedge fund investors from $1 million to $2.5 million, the agency is receiving hundreds of letters (WSJ, subscription required) from individual investors. Many of these experts make excellent arguments for why, if anything, the net worth thresholds should be raised. Here are some of the best arguments: One of them asked why small investors should be restricted from hedge funds, but not speculative Pink Sheets stocks? Another summed up the laissez-faire argument pretty succinctly: "Stay out of my wallet, stop trying to protect me from myself, stop presuming to know more than I do about my own life, risk-tolerance, and financial sophistication."
The problem with hedge funds is that it makes very little sense to regulate them in such a sweeping, unilateral way. Why should a conservative fund that specializes in lightly leveraged merger arbitrage or covered calls be regulated the same way as a highly leveraged fund that trades Pokemon card futures? It just doesn't make sense.
But since the whole idea of hedge funds it that they're not regulated, treating each fund differently would require investigation of each one -- which defeats the whole purpose.
While there are certainly compelling and intuitive arguments for relaxed regulation, there's really no reason to allow mom-and-pop investors to put money in lightly regulated investment pools. On average, they don't provide better returns than index funds and the high fee structure would lead the average investor to do considerably worse than they could with mutual funds. Perhaps most importantly, allowing ordinary people to invest in alternative investments would almost certainly increase the amount of money lost to Ponzi schemes and other investment frauds -- and the losers would be middle-class retirees. These are the people who can least afford it, and also lack the resources that pension funds and other common hedge fund investors have to vet and research potential investments.
The best idea that I've seen for dealing with this situation comes from an individual investor from New York. He suggests allowing investors with a net worth of $1 million to invest 10% of their net worth in hedge funds, 15% for those with $2 million, and so on.
That's an idea the SEC should seriously consider.
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Reader Comments (Page 1 of 1)
9-02-2007 @ 5:28PM
keith said...
what is the matter with you?
no guts no glory?
FREE MARKET......got money then play with it.
9-03-2007 @ 1:29PM
kimk20554 said...
I remember when I started trading stocks ten years ago, there was no choice but to go the Internet route because no broker would touch me with the size investment I had. I met some of their minimums but still they kept telling me to put my money into a nice safe mutual fund and forget the market. I could see them shaking their heads and if I'd been in front of them I'm sure they would have patted me on the head. Now, ten years later I have multiplied that initial investment by 1500, no BS.
If someone wants to take a gamble and lose their pin money it's their business. It's so basic, you need know nothing about finance, no governing body should have the power to tell us what to do with our money.