200 have filed comments on SEC hedge fund plan

Date: Tuesday, February 20, 2007
Author: Sara Hansard, Investment News

WASHINGTON — The SEC’s efforts to protect hedge fund investors have stirred up free-market enthusiasts, who are making it clear they don’t want the government limiting their investment options.

With about 200 comments already filed on an SEC proposal, issued in December, to raise the wealth threshold for hedge fund investors, almost all the comments are in opposition, and many of them are from private investors. The comment period on the proposal ends March 9.

This isn’t the first time that the SEC has received a large number of comments from individual investors. When the commission proposed new rules for mutual fund governance, it received thousands of comments, according to Douglas Scheidt, chief counsel of the division of investment management.

Nevertheless, hedge fund manager Phillip Goldstein, who filed a lawsuit that resulted in a federal appeals court’s overturning the SEC’s first attempt to register such funds, said that the large turnout on such an esoteric subject is significant.

“It’s an incredible outpouring of opposition from the public,” said Mr. Goldstein, principal in Bulldog Investors General Partnership of Saddle Brook, N.J. “[The SEC] can’t just blow it off.”

Seeing red

Ironically, the major players in the hedge fund industry so far have not weighed in on the proposal to raise to $2.5 million, from $1 million, the minimum amount of investible assets needed to invest in hedge funds. Most of the larger hedge funds aren’t thought to be affected by the proposal, because most of their investors meet the threshold limits (InvestmentNews, Nov. 6).

“People are just kind of angry that the SEC would take them out of hedge funds,” said Mark Williams, a software consultant in Sapphire, N.C., who said that he has realized more than 20% annually from an initial $150,000 investment he made in a hedge fund in 2000. “This would take me right out of the hedge fund world.”

Mr. Williams became so captivated by hedge funds that two years ago, he started his own fund of hedge funds, Gemstone Capital Advisors, which he eventually hopes will attract other investors once he develops a track record. Raising the wealth threshold will make it harder to do that, he noted.

Like many of the opponents of the proposal, Mr. Williams thinks that the SEC should find a way to allow small investors who don’t have $2.5 million to invest in hedge funds.

“I don’t have a $2.5 million

portfolio,” he said, “but I probably know more about hedge fund investing than 99% of the people in the U.S.”

Small investors should be able to hire investment advisers to review hedge funds to determine their suitability, Mr. Williams added.

SEC member Roel Campos agrees that small investors should have access to hedge funds for diversification, and he thinks that funds of hedge funds may be the best way to accomplish that.

“I’m pushing our agency to study them and let them go into the marketplace,” he said.

But Mr. Campos and others at the SEC argue that placing limits on retail hedge fund investments is appropriate. While a net worth test doesn’t necessarily gauge an investor’s sophistication, he said, it is appropriate in determining whether an investor can afford to lose money.

In addition to investors who wouldn’t meet the SEC’s proposed wealth threshold, and startup hedge fund operators, many financial advisers who are just beginning to use hedge funds as alternative investments would be cut out of the business.

The proposed rule would prevent Steven Kaye, a certified financial planner, from finding the most suitable investments for his clients, he said.

Mr. Kaye is the president and founder of American Economic Planning Group Inc. in Watchung, N.J. The firm has about 200 clients who are invested in hedge funds, about half of whom wouldn’t meet the proposed wealth threshold, he said.

While the proposal would allow clients to remain in hedge funds in which they already were invested, they couldn’t invest more money in the funds, and new investors who didn’t meet the investment thresholds would be barred from investing.