Subject: File No. S7-07-12
From: Andrew Pierwola

August 30, 2012

The SEC is making an enormous mistake in allowing the Hedge Funds to advertise directly to consumers.

In a June speech, the SEC's director of investor education, Lori Schock, stated: "These offerings are not for everyone and carry a very high degree of risk. For every successful venture, there are more numerous failed ventures."

This is an understatement of the century.

The performance of hedge funds demonstrates very clearly that they aren't investment vehicles, but rather compensation schemes designed to transfer assets from the wallets of unsophisticated investors to the wallets of the purveyors.

For the past one, three and five years ending July 2012, the overall HFRX Global Hedge Fund Index produced annualized returns of -5.2 percent, 1 percent and -3.4 percent per year, respectively. We can compare these returns to two simple benchmarks:

The SP 500 Index for stocks
A five-year Treasury index for bonds

For the same one-, three- and five-year periods, the SP 500 returned 9.1 percent, 14.1 percent and 4.4 percent per year, respectively. And five-year Treasuries returned 4 percent, 6.1 percent and 6 percent per year, respectively. And for the period 2003-2012, the HFRX index underperformed every single major stock and Treasury bond index, while exposing investors to far more risk.

If wealthy investors want to foolishly transfer their assets to hedge fund managers, shame on them for not doing their homework and investing in things they don't understand. But one can only wonder what the SEC is thinking in moving to allow hedge funds to advertise. As David Swensen, the chief investment officer of the Yale Endowment, once said said: "Thievery, even when dressed in the cloak of SEC-approved governance, remains thievery... as the powerful financial services industry exploits vulnerable individual investors."


Andrew Pierwola, MD