Subject: File No. S7-30-04
From: Alex M Paul, CFA

July 21, 2004

I am an employee of a small hedge fund in Chicago and have been employed in the hedge fund industry since 1998. I have my CFA designation and have received my MBA from the University of Chicago.

I believe that the SEC must take steps to increase oversight of this industry, and this proposal is a good start. This business is changing, and as your proposal states, the hedge fund world is now actively seeking assets from small investors. This is a HIGHLY questionable practice in my opinion.

As an example, I know a retiree who just this month went through a portfolio review with UBS. This retiree has done a commendable job preparing himself for retirement, but he barely meets the 1 million dollar liquid asset requirement needed to invest in hedge funds. Nonetheless, after looking at his entire portfolio, UBS recommended that he put 40 percent of his assets into a hedge fund that will be run by UBS, has no track record, the managers have no experience running a leveraged product, and the quarterly management fee would be 0.75 before other profit sharing. The written proposal even contained hypothetical returns of what the fund might have done over the last few years, had it existed.

This is just one example of what I consider to be sleazy practices now prevalent in the industry. High potential fees bring out the worst in people marketing these products. Ridiculous promises are pitched to retirees to get 40 percent or more of their assets. Small investors are going to be taken in by this. Even if there is no fraud, there will be highly deceptive marketing and remarkably inappropriate advice driven by greed.

The SEC needs to step in and watch this industry more carefully. That said, the regulatory net often encompasses more than it needs to. At my company, for example, we have a small client base and a handful of those clients including insiders represent over half of our 40 million dollars. Since the purpose of the regulatory initiative is to protect investors in these products and discourage fraud, it would be great if the registration rules could somehow allow existing hedge funds that have fewer than say 50 clients as defined by your proposal to register voluntarily, even if they are over the 30 million dollar asset threshold. Or perhaps insiders money should not be counted toward this total. If we grow as we hope to, registration comes as growth occurs, but we arent burdened with the costs until that time.

I know the devil is in the details of these kinds of exceptions, and they are not that important compared to the need for greater regulatory scrutiny overall, but a straight asset based cut-off for registration might not be the best approach. Similarly, you may want any new fund with greater than 50 clients regardless of asset size to register in order to discourage fraud at even a small scale.