September 15, 2004
Neither for, nor against this rule, I want to take the opportunity to comment on the general place of hedge funds in U.S. investment management regulations.
Unlike mutual funds, many hedge funds are one-off specialized investment pools catering to the needs of a limited set of wealthy individuals. These people have the right to pursue their financial interests in a creative, unregulated manner if they so choose.
Perhaps cold-hearted, but modestly wealthy people who lose their money in un-regulated hedge funds have only themselves to blame. If a hedge fund commits fraud the American taxpayer should not foot the bill through the S.E.C.
Investors who expect protection should invest in mutual funds.
Regulating hedge funds though wealth-minimums remains the best solution. But the minimums need to keep up with market valuations. The acid test for the S.E.C. should be, what amount of money would a citizen need to hire a team of lawyers and accountants to monitor and defend their interests in the hedge fund? Or, put another way, what level of wealth is insufficient to protect an investor from an unscrupulous hedge fund?
Hedge funds that allow small investors to enter them, in any way, should be regulated like mutual funds. As a group, there is no proof that hedge funds outperform mutual funds. If some people want to believe they do theyre entitled to their opinion. But the S.E.C. shouldnt succumb to the PR that wealthy people are getting better returns. If youre an unregulated hedge fund you give up the right to compare yourself to mutual funds.
U.S. mutual funds are the most regulated public investments in the world. Further regulation of hedge funds puts them in the class of mutual funds, gives them a respect-from-transparency that is not complete and therefore misleading to the public. Indeed, it will worsen the very problem the S.E.C. is trying to combat. Too much small investor money is entering the hedge funds. If the S.E.C. wants to send a message that it will make hedge funds safe then it needs to fully regulate them.
If the hedge funds have any sense they will voluntarily work with the S.E.C. to stop this flood of small investor money looking for quick riches.