July 27, 2004
I have 3 comments:
1) For a 3-C-7 fund, the sophistication of the investor is at an extremely high level. They will rarely make an investment without conducting a high level of due diligence and demanding some sort of transparency. In my view, 3-C-7 hedge funds should not have to register.
2)An alternative approach to the proposed registration scheme would be to eliminate any way a non-accredited investor can participate in a hedge fund, eiher directly or through a pooled vehicle. These are the type of investors that hedge funds were never intended to serve and it is these investors who are least able to do due diligence and/or demand transparency.
3) Finally, the requirement to register when assets reach $25 m is extremely burdensome. The comparison to small money managers that currently register is an absurd comparison. No money manager starts a firm, with all the associated paperwork and lower fees, with the intention of staying small. Many hedge funds, on the other hand, purposely stay small. The rule will have the effect of forcing a fund to stay under $25 m or trying to grow well beyond $50 m. Any fund in between $25 to $50m, which is a very typically sized hedge fund, will have all the heavy costs of being registered without the fee stream or infrastructure to easily shoulder the burden. I believe the asset requirement should be raised to at least $50 m. At that level of assets, a fund can better handle the associated costs of the proposed rules.