January 28, 2007
Greetings to the Securities and Exchange Commission,
I am writing in regards to the recent proposal to increase the minimum net worth currently required for investing in a hedge fund. I am writing to voice my support for an alternative proposal outlined by Mr. John Maudlin, whom I quote:
"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."
Although I support the concept of protecting the public from unknown risks, I believe that this protection is outweighed by the opportunities that non-high-net-worth individuals are missing due to restrictions on their investment options.
Thank you for your attention. Sincerely,
Matthew Millar