January 28, 2007
I feel strongly that the SEC should not raise the requirements for investing in Hedge Funds. I read John Mauldin's newsletter on January 26th, 2007 and agree with much of what he said. I've copied some key comments from his newsletter that I agree with.
I think it is philosophically wrong to limit the investment hoices of investors based simply upon assets.
Investing in Hedge Funds-Benefits
The premise of Modern Portfolio Theory is that you can smooth out the returns and decrease the risk of an investment portfolio by adding noncorrelated investment asset classes, even if those individual classes are individually highly volatile. Many hedge funds' styles, by any reasonable assessment, are highly uncorrelated with the stock and bond markets. High-net-worth individuals and institutions are taking advantage of this fact by diversifying a part of their portfolios into hedge funds. This reasonable diversification should be made available to smaller investors as well.
No one would suggest that all or even a significant proportion of an investor's portfolio should be in hedge funds. But a reasonable diversification is appropriate.
There is no real reason to believe that smaller investors cannot understand hedge fund strategies, if properly explained. If investors can be assumed to understand the risks involved with individual US stocks, foreign stocks, commodity futures, currencies, options, mutual funds, and real estate, not to mention a host of Reg D limited partnerships, then how can anyone suggest that hedge fund strategies are beyond what investors can understand?
I should note that in England there are no real net-worth requirements for investing in hedge funds. Investment advisors are required to determine the sophistication and suitability of potential investors regardless of net worth. And Europe is slowly moving to open up hedge funds to investors within a regulatory framework.