February 7, 2007
I believe it would be a mistake to raise the net worth requirement for investing in hedge funds. Why should this investment tool be available only to the already wealthy? The rich get richer (and hedge funds are one of their greatest tools for getting richer), but I believe the wise who are not already wealthy also deserve an opportunity toward that end. Why not?
To assume hedge funds are too dangerous for the average investor is too simplistic. Although hedge funds can utilize greater leverage than most other investment vehicles, hedge funds are typically managed by professionals who know enough not to over-utilize leverage, and thereby to put their subscriber's investment at unreasonable risk. Of course, we have all heard of hedge funds which have over-leveraged and failed. I acknowledge such fund managers made grave errors in judgment. However, many (supposedly safer) equity funds have also failed in the past through management error, so the factor is not unique to hedge funds.
Hedge fund investment, rather than becoming limited to the top one percent (by net worth) of investors, should instead become an investment tool the average investor can employ for a portion of their diversified portfolio. To simply assume average investors are not sophistocated or savvy enough to know how to utilize this tool would be an infraction of democracy. By law, we cannot discriminate because of one's gender, race, or sexual preference. Neither should we discriminate because of one's financial worth.
If we are going to change the rules, let's instead go the other direction to level the playing field; make the rules for investing in hedge funds similar to the rules for investing in equities.