As you may know, in 1982 the SEC determined that in order to invest in hedge funds an investor must have at least $ 1 million in net worth. Recently, the SEC proposed adding a requirement that a hedge fund investor also have $2.5 million in investments. According to the SEC, this type of financial litmus test is the best way to ensure that only sophisticated investors take the risks associated with hedge fund investment.
According to a recent CNN article, those implicitly deemed “unsophisticated” by the SEC didn’t take kindly to the proposal. In fact, such investors sent numerous comments to the SEC complaining that they are perfectly capable of looking after themselves and that they don’t need the SEC to determine who is, and is not, capable of investing in hedge funds. Click here for a link to the SEC’s comments.
What we find most interesting about this entire debate is the underlying premise of the SEC’s proposal. The SEC seeks to remedy the problems associated with hedge fund investment – which are primarily caused by the lack of transparency -- by limiting the number of hedge fund investors. We, in contrast, would argue that simply demanding more transparency from hedge funds is a more logical, and effective solution. As the investor comments make clear, you don’t have to be rich to be smart. We would only add that being smart does you no good without adequate information.
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