From: Gary Marks
To All SEC members:
Subject: Raising the limits for hedge fund investors to $2,500,000
I am a professional money manager -- I have a new book just published by John A Wiley & Sons, the topic of which is investing, financial planning, and risk analysis of the markets. (Rocking Wall Street -- see on Amazon, etc.)
I need to tell you that in the 2000-2002 bear market the only thing that saved me from financial ruin was that a majority of my illiquid assets were invested in conservative hedge funds that had very little correlation to the world stock markets, or gold, or any other speculative venture that seemed like a good idea at the time. I was not worth $2.5M back then. I was barely accredited by that era's standards. Yet even before I was accredited I was capable of understanding the inherent risks in the stock market, and the strategies many hedge fund managers were successfully deploying that limited the loss of capital.
Meanwhile, during those same three years, most of my friends and family watched helplessly as their "diversified" stocks and mutual funds depleted 25-50% of their life savings.
Raising the limits for hedge fund investors to $2,500,000 strikes me as a discriminatory practice that would benefit only the richest of the rich. The current 7-8% of potential qualified investors would shrink to only 2% of all Americans. Who would this be serving? Maybe stock brokers and mutual fund firms. But not the individual investor.
Investors in Europe and South Africa do not have their net worth define their ability to "understand" their investments. Why should US citizens have their level of sophistication be defined by the amount of money they have saved, or inherited from their parents, or won in a lottery? It makes no sense to use this criteria as a guideline.
I would like all investors to have the capability to invest in strategies that are not correlated with the direction of stocks or bonds. Hedge funds offer a vast array of choices, some bad ones, some ineffective, some very good, and some, in my opinion, are the best investments in the world. Why should only the super rich have access to these managers?
Most hedge fund investors I know are seeking a risk averse non-correlated alternative, not 100% a year profits.
Raising the limits to $2.5M simply limits even more Americans from what I believe should be their right to choose investment strategies that can potentially limit their risks in bad markets.
Investors have the right to short the S&P, short the dollar, buy gold, copper futures, naked calls, put all their money in a single stock, or an Internet micro-cap mutual fund, etc. These directional bets are often far more dangerous than investing in the average hedge fund. But anyone with a few thousand dollars can use a TV show "expert" as their guide, or have no guide, and play this game of roulette until they lose all their money. Why is the SEC not creating rules to protect them from these truly dangerous investment habits, many of which are encouraged daily in the financial media?
CNBC recently reported: "Uranium is up 35% this year. Should YOU invest in Uranium? We'll be right back to find out." Of course, a Uranium expert then came on and said YES, invest in Uranium. It made 35% last year. . . . No one with an opposite opinion was interviewed. No one said, "Well, if it's up 35% in one year maybe it's now overvalued or at least temporarily overbought." How many unsophisticated investors suddenly found their brokers telling them they could buy Uranium futures for their portfolio as a "diversifier?" Why is there no regulation about that?
Furthermore, Americans who are today "sophisticated" enough to invest in hedge funds, soon may become unsophisticated because they only have $1.5 M or $2M, instead of $2.5M. That litmus test seems to make no sense. Where one draws the line is so arbitrary logic becomes lost in the process.
Three other points I'd like to make:
The fund's accounting and atty costs may go up slightly, but they owe limited partners access to the business. After all, these are PARTNERS. Not clients. Not customers.
These suggestions above I feel would allow the SEC to reach its objectives of protecting investors without disadvantaging them or limiting the choices they might have to protect themselves in a bear market or a weak economy.
These new rules would also NOT create a lot of SEC oversight, or the need for a visit to the fund's offices. These regulations could be checked on the phone instead of creating costly forensic office visits. The attys would have to list the independent accountant and auditor in the documents with contact names and phone numbers. The oversight could then be done as frequently as any institutional or retail investor or SEC representative desired.
I believe this would prevent most frauds that go unchecked in the industry today.
Yet frauds and thefts in the hedge fund industry, and/or major losses of capital from huge directional bets, while juicy headlines, or no more prevalent in the hedge fund world than they are in many other parts of the financial world. They make headlines because very rich -- supposedly sophisticated -- investors got ripped off or burned by supposedly brilliant managers. Apparently even sophisticated investors can fall prey to a sociopath who is using a naive or corrupt in-house accountant, or putting out phoney templates of account statements with a phoney accounting firm's logo on it. Or investing all $9 billion dollars in natural gas futures. (The later type of speculative risk is often disallowed in the fund documents by saying the fund will only invest up to 10% of its partner's assets in a given idea, etc..)
Please know I WANT hedge funds to be more regulated. I just want the regulations to be effective, more cost effective for the SEC and US tax payers, and to allow, and even encourage, free choice and more options to investors who wish to find non-correlated investing strategies to hedge their risk against the frequent rampant speculation in the marketplace.
Thanks for your time!