From: Paul Metz
Sent: February 11, 2007
Subject: File No. S7-25-06

I support making hedge funds more available to investors of all net worth.

This letter bears summary quotes from the writings of John Mauldin, an expert in the hedge fund industry.

Why should 95% (or maybe soon to be 99%!) of Americans, simply because they have less than $1,000,000 (or $2,500,000?), be precluded from the same choices available to the rich? Why do we assume those with less than $1,000,000 to be sophisticated enough to understand the risks in stocks (which have lost trillions of investor dollars), stock options (the vast majority of which expire worthless), futures (where 95 % of retail investors lose money), mutual funds (80% of which underperform the market), and a whole host of very high-risk investments, yet deem them to be incapable of understanding the risks in hedge funds?

It is my contention that the positive values that hedge funds offer to rich investors should also be offered to everyone, within a proper regulatory structure. The current two-class structure (rich or not rich) limits the investment choices of average Americans and makes the pursuit of affordable retirement more difficult than it should be. The rich have a considerable advantage in growing assets for retirement, in that they simply have more assets to begin with. They should not also have an advantage in better investment choices.

The Hedge Fund Investment Company

Let me suggest the following: the creation of a new type of investment company vehicle. Simply modifying the current mutual fund rules might work, but it is not direct enough, in my opinion. Let's call this new vehicle a Hedge Fund Investment Company or HFIC. Let me describe it first and then outline some of the advantages.

A hedge fund would be allowed to register with the SEC (or CFTC if there is a commodity focus) as an HFIC. They would be required to have an annual independent audit, at least quarterly independent valuations of their assets, and independent administrators, plus they would be subject to SEC or CFTC advertising rules. Nearly all of the rules which apply to mutual funds should apply to an HFIC. There would be few, if any, limits on the strategy the fund could employ, and they could charge a management fee and an incentive fee. They would have to fully disclose not only the relevant risks, but also their strategies, fees, personnel, and management experience.

As with mutual funds, there would be no limits on the number of investors. They would be allowed to advertise within current regulatory guidelines. With certain restrictions outlined later, they would be able to take non-accredited, or average, investors

As noted above, hedge funds pose a set of different and unfamiliar risks than do stocks, bonds, or mutual funds, not to mention futures, options, and real estate, all of which are available to the average investor today. I would suggest that for a certain period of time, say 7-10 years, an HFIC be limited to investors who could demonstrate a required level of investment sophistication or to investors who used an investment advisor or broker who had passed an appropriate exam demonstrating competency in hedge funds (such as the Chartered Alternative Investment Analyst program sponsored by the Alternative Investment Management Association) or who had a sufficient number of years in the industry.

After the 7-10 year period, when investors had come to an understanding of what an HFIC is, and the funds themselves had developed sufficient track records, the funds would then be available on an equal basis with mutual funds, stocks, bonds, futures, real estate, options, and the host of other risky investments currently available to the average investor. This time period would also allow for a support industry and independent analysis firms to develop.

The simple fact is that most institutional funds hire outside analysts to evaluate and recommend hedge funds. They also hire consultants and outside managers to recommend stocks and bonds. The actual individuals sitting on institutional and pension boards do not make the initial investment decisions, although the final authority is in their hands. I would suggest for your consideration that many of the people on these boards are not accredited investors. Yet they are considered capable of evaluating the appropriateness of whether to invest in hedge funds. The evidence is that increasingly large numbers of them are doing so.

Paul Metz