Little Guy Protected, But Not Little Hedge Funds

The proposed accredited-investor changes may have a devastating impact on small and start-up hedge funds even as their larger brethren remain unscathed by the changes, The New York Times suggests. With the proposed standard increasing the requirement to enter the club of hedge fund investors to include $2.5 million in investable assets, some 88% of previously qualified folks will be eliminated, and with that goes a major source of capital for the newbies. Attorneys representing these smaller hedge funds complained to the Securities and Exchange Commission, but to no avail. "There is no viable argument that would support the notion that an investor with $2.5 million in investable assets is better suited to determine the quality of a hedge fund investment than an investor with a net worth of $1 million" (the current standard), attorney Ron Geffner of the law firm Sadis & Goldberg told The Times. The firm counts among its clients some 400 hedge funds and funds of funds. Unconvinced, the SEC proceeded to introduce the new standards, Geffner continued, as the agency and politicians have been on "a witch hunt for hedge fund managers making too much money, for violating the law and not adding value to the economy when in reality that is the exception and not the rule." The proposed rule does smack of unfairness, too, because it exempts venture capital funds since they invest in start-up companies, but the SEC doesn’t explain why a start-up companies are OK to invest in but start-up investment managers are not.