Being Rich Makes You Smarter??
Posted by Frugal on February 23rd, 2007
With the latest SEC proposal, it would take $2.5 million in investments instead of $1 million in net worth to be able to invest in hedge funds. I think it would make more sense to require a maximum percentage of networth invested in hedge funds, instead of making such restrictive requirement, which definitely puts the hedge funds out of my reach and many more ordinary folks.
I can’t agree the following comments more. Instead of policing the greedy corporate executives, SEC has decided to put up more barriers for small guys to reach wealth:
“You have to be rich to be smart?”
“I find the idea that the definition of an accredited investor is based solely on a net worth requirement to be repugnant to the principles of equality of all people. Why should the “rich” be allowed a wider array of investment options just because they are rich? This is often just as much an accident of birth as race or sex….I take this proposed change as a direct affront on my ability to take care of my and my family’s future. The approach that you appear to be taking is short-sighted, mean-spirited and represents the easy way out.”
“The proposed rule changes are discriminatory and anti-Constitutional. We have long since done away with property qualifications for voting, and with other forms of discrimination throughout our society.”
“If I gave you $2.5 Million would it make you any smarter?”
With the advent of internet, the average investors are so far ahead of the investors twenty years ago. Maybe SEC should make the structure of the regulatory controls more fitted towards modern investors?
Posted by “Frugal” at My 1st Million At 33.com
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February 23rd, 2007 at 8:19 am
Hey 1st Million,
Bang up post. Good topic, good arguments.
best,
James
February 23rd, 2007 at 10:12 am
“Please don’t protect me from myself! I am quite capable of protecting myself! It’s you that scares me.” – That’s not what the data from Frank Russell and Co. shows.
I don’t see the rule as discriminitory one bit. Anymore than Mutual Fund minimums ranging from $1000 – $100,000. Or private equity managers whose minimums range from $50,000 up to $1,000,000. Or brokers, who manage fee-based accounts, with their own arbitrary minimum account size.
When I was a broker, I only handled stock accounts. Therfore, I had no retired clients (bonds).
Also, account size can be important for controlling costs and keeping the number of individual accounts low.
But, the biggest reasons, is because of the lack of transparency and discretion, it is very difficult to sue the fund for “suitability”, which is commonplace on Wall St.
February 23rd, 2007 at 10:23 am
BTW, LOVE THAT ACTION IN GOLD & SILVER. (I never had a doubt) THE PM STOCKS ABOUT TO PLAY CATCH-UP? ME THINKS SO. LOL
February 23rd, 2007 at 12:14 pm
While I agree that it would make more sense to police the percentage of one’s networth that can be invested in hedge fund, logistically that’s probably too difficult to do. The problem with Hedge Funds is not that they’re risky and should be avoided by the average investor. There are plenty of equally risky mutual funds that the average investor should avoid placing a large portion of their holdings in. The problem is the way Hedge Funds and other more exotic investments are sold. In the end it comes down to the high fees associated with these investments. Because of these fees they are often sold more aggresively than they should be. While you can’t protect someone from their own stupidity, you certainly want to prevent people from being fleeced. Hedge Funds have come up because they’re sexy right now, but it could be said of any investment. The limit raise to 2.5 million, I find unintersting at best. It basically adjusts the limit for inflation. The better question is as a rule does enforcing a limit prevent unsuspsecting people from getting fleeced? I’m not sure what the answer to that is.
February 24th, 2007 at 9:20 am
Sure, agree that the SEC is being too protectionist for your average investor, but look at the run up in the sheer numbers of hedge funds out there. There are thousands of them now. Do you honestly think there are enough smart people running them to warrant the outrageous fees and percentage of returns they are taking? I highly doubt it. Couple that with the fact that some of these guys running them are still in their 20’s and have yet to see their first real bear market. It should scare the beeejeasus out of you when you think of investing in one, but that’s probably a whole other post. In my mind, these funds do nothing more than raid the portfolios of their clients by investing them in risky as hell investments with questionable strategies. They may work in a bull market, but I see an impending consolidation (when returns don’t meet expectations) and a possible implosion when the market turns. It could be a year from now or several years from now, but watch out when the market turns.
March 3rd, 2007 at 2:07 am
The arguments are good ones, however, we all need to remember that hedge funds are pretty much a wild west, with very little regulation and few reporting and disclosure requirements. Limiting access to very high net worth individuals does smell a little bit of discrimination, but it probably does have the effect of limiting these investments to people who can probably handle the financial damage if the fund goes under (and MANY of them do).
In addition, think of how difficult it would be to regulate / limit investments in hedge funds to a percentage of net worth. What happens if someone’s net worth declines, or if his investment in the hedge fund greatly increases in value? Would they then need to sell their investment in the fund?
I say if you have to have regulations, they’d better be cut, dried and simple to enforce, even if there are some undesirable effects. We probably all agree that the intention is a good one, and the impact is also probably mostly positive.
March 7th, 2007 at 12:59 am
Although percentage of networth is a little bit more difficult than using an absolute threshold, the enforcement for both is difficult. My networth changes all the time. And if you have significant networth in stock market, that’s what happens. It can fluctuate a lot.
I still think it’s better to do the right thing using percentage, and leave the marketplace of hedge funds to require their own minimum investment.
For sure, last time when I was asked if I was a “qualified investor” with networth > $1 million, they didn’t ask me to submit all financial statements for verification.
If you can come up with the minimum cash, and if you understand the guideline & feel comfortable with the risk, you should be allowed. After all, hedge funds won’t be your accountants, verifying all of your assets for net worth.