February 22, 2007
It is remarkable the government lets people drive cars (x thousands of deaths every year), buy overpriced tech stocks that fall to zero, engage in extreme sports (very high risk of injury or permanent injury), smoke tobacco (known carcinogens), etc. BUT for some reason wont allow US citizens of normal financial means to invest with hedge fund managers (who arguably produce higher returns with lower volatility than long only managers)
Products of Depression-era beliefs and thinking, the Investment Advisers Act of 1940 and the Securities Exchange Act of 1933 need drastic overhaul. In particular, the SEC has created an investment apartheid scenario, allowing only the wealthy to invest with managers who charge a performance-based fee. Since many of the worlds best managers use this fee structure, and it is well-accepted, why are they preventing me from participating?
There is NO connection between an individuals net worth and their financial sophistication. Not only did wealthy and sophisticated investors lose substantial sums in the LTCM fiasco, many investors of average net worth have been very successful managing their portfolios Where is the net worth/financial acumen connection? It doesnt exist, and never did.
Today, unlike the 1930s, there is 24 hour financial news, investment seminars, a wealth of books, and sophisticated financial print media. The typical investor of today is light years ahead of the understanding of Depression era investors. There is no need for government oversight of the hedge fund industry, and no benefit provided by net worth barriers to entry. Therefore, let us not only drop the idea of raising the net worth barriers, but embrace the need to ELIMINATE THEM ENTIRELY. Greatly expand the current limit of 99 investors, which will drop the minimum investment to reasonable amounts.
The solution is to push the responsibility for investment results back onto the investor. Strictly enforce rules to punish fraud and misrepresentation. However, the answer is to teach the investor how to perform due diligence, not preclude their participation.
Performing due diligence is an activity we engage in every day. This includes selection of a surgeon, attorney, or other professional. Why is selecting a hedge fund manager any different? The answer is that it is not. People will always ask for whatever information they deem pertinent. As an idea, dedicate part of the SEC website to teaching how to properly undertake due diligence, but do not preclude them from any investment. Make investors take responsibility for their results. Mistakes are a great motivator to improve our selection skills
If an individual wants to gamble his future on long-only funds, that is his business. However, give the more astute investor the option of creating a portfolio of well-chosen hedge funds. This will help ensure his retirement and remove the burden of managing his own money. Whether he has $5,000 or $50,000,000, the investor ought to have the freedom to invest as he sees fit.
The people of this country want and deserve better. If there is a common theme running through the letters submitted on this proposed rule change, it is this: investors are sick of an overbearing and paternalistic SEC telling them what they can, and cannot, invest in. If Christopher Cox cannot bring himself to change his perspective, possibly it is better that he step aside for someone who better understands this issue.
Stacie Matson, investor