March 6, 2007
As an investor who has bought and sold mutual funds, stocks, ETFs, options, Futures contracts, as well as TreasuryDirect for the past ten years I have a vital interest in the proposed rule changes in regard to hedge funds and alternative investments not currently regulated by the SEC or the CFTC. While it might make some sense to raise the bar for investors qualifying as accredited, I strongly believe that this is not the best way to protect supposedly unsophisticated investors while at the same time allowing all Americans, whether rich or not, access to reasonable choices for their retirement savings.
I have already gone through a self-educational process before investing using the vehicles listed above, and it seems unlikely that the learning curve would be any more arduous for hedge funds (particularly established diversified funds of funds). I recently saw The Wall Street Journal reported that SEC Commissioner Roel Campos said there was a need for very moderate oversight of the hedge-fund industry to see the full picture of risk to investors and the market. He suggested a carrot-and-stick approach: easing marketing restrictions for hedge fund advisers that register with the SEC and submit themselves to a degree of regulatory oversight.
This seems like a proposal which could meet the requirements of the SECs mandate far better than the one-size-fits-all accredited liquid net worth rule. If it is true that the possession of money and brains are not significantly correlated, then it is reasonable to allow Americans of modest financial assets who are willing to do their due diligence of a hedge fund, just as they should do for a mutual fund, or an online stock purchase, to invest a portion of their portfolio in that hedge fund. What would level the playing field is to require such hedge funds to register with the SEC or CFTC and submit to independent audits and full disclosure of their risks, fees, and other interests. As I understand what Commissioner Campos proposed, the hedge funds would have a choice whether or not to register and provide such disclosure as well as having their advertising conform to rules similar to other registered entities.
This is a step in the right direction and should be discussed and pursued as more likely to bring benefits to the taxpayers who support the SEC, than the band-aid approach of simply raising net worth thresholds. It is time to take hedge funds out of their status of protected secrecy and find out which ones can thrive or survive in the open market.
P.S. For more detailed arguements for Equal Choice, Equal Access, Equal Opportunity, please go to the recap of John Mauldins May 2003 Congressional testimony within his newsletter from Jan. 26 of this year: http://www.frontlinethoughts.com/pdf/mwo012607.pdf