February 21, 2007
February 21, 2007
To Whom It May Concern:
I am writing in opposition to part of proposed rule S7-25-06. Currently, a hedge fund manager may accept investments from an individual who has net worth in excess of $1 million and who understands the risks of the investment. Individuals are currently allowed to count the equity in their primary residence towards their net worth. The SEC is proposing to raise the net worth threshold to $2.5 million, and to require individuals to exclude the value of their equity in their primary residence from the computation of their net worth.
This rule primarily benefits large hedge funds that already require minimum investments in excess of seven figures. These funds are essentially unaffected by the new rule. Ironically, some of the most dramatic hedge fund collapses in recent history have been associated with these large funds, like Long Term Capital Management and Amaranth.
The SEC has not demonstrated, as part of its consideration of the proposed rule, that smaller hedge funds are a threat to millionaires of modest means. Nor has the SEC demonstrated that there are systematic, industry-wide attempts to lure individuals who barely meet the accredited investor criterion into making inappropriate hedge fund investments.
As the manager of a small hedge fund, I have accepted investments from individuals who would not meet the new rule proposed by the SEC. These individuals are generally intelligent, reasonable people who invest a small part of their total net worth with us. They are not capricious people who have $50,000 in retirement savings, a $950,000 home, and who are looking to take a spin at the roulette wheel. Generally speaking, our investors have a variety of investments (including investments in real estate, mutual funds, annuities, small businesses, et cetera) but are looking to tap into investment opportunities that seem to be available only to high net worth individuals.
The SEC should be encouraging competition in the hedge fund industry. The presence of smaller hedge funds with robust investment strategies and competitive fee structures can only benefit investors. By imposing this rule, the SEC will effectively be handing over the entire industry to a few players and stifling growth opportunities for smaller funds.
The real problems in the hedge fund industry have nothing to do with the precise threshold used to distinguish an "accredited investor" from a "non-accredited investor." The SEC should work instead to improve transparency at the very largest hedge funds, which have the ability to noticeably impact entire economies with their investment strategies. These are the same types of hedge funds that have previously been bailed out by the federal government. If the SEC wants to go a step further, it should slow or limit the growth of hedge fund investments made by pension funds or other institutional investors who represent ordinary Americans. (Of course, it doesn't really strike me as a big problem if CALPERS wants to invest 20% of its assets in a few dozen hedge funds.)
One compromise measure that I might support would be to leave the $1 million threshold where it is, but to forbid individual investors from counting the value of equity in their primary residence in the net worth computation. This measure would mitigate foolish investments from some of the newly rich whose net worth increased so much during the recent real estate boom.
David J. Hamrick
Bulwark Capital Management, LLC