January 27, 2007
The legitimate need to protect the public from investments whose risk is not well understood is not served best by limiting who can participate based on wealth. Given the minimum investment in most illiquid funds, even a 2.5m net-worth minimum is not a particular sensible hurdle -- it is possible to lose significant portions of ones net worth. If the objective is to prevent people from wagering too much, why not make the limit $10m? $100m? In a world where one can wire $100,000 overnight to exotic commodity futures funds no matter one's net worth, these limitations just don't make any sense.
If investor competence is the issue, a standard test should be administered, not a net worth requirement. Money can be achieved by work, by luck, by theft and any number of other measures. It does not always imply competence.
I suggest the "high net worth" requirement be dropped entirely and replaced by something more merit and education based. The minimum investment amounts and personal contacts required for the more exotic investment vehicles will take care of the merely incompetent, plenty of whom have been blessed with money. The exam will take care of the competent, not all of whom have been blessed with money.
Opening the hedge fund industry to the general public will result in dramatically greater competition, which will naturally serve to increase liquidity and decrease fees. This higher liquidity and lower fee environment will itself help to protect investors more than a lot of regulation will.