Are You Rich Enough to Invest in a Hedge Fund?
The government wants to make it harder for people to invest in these sometimes-risky investment funds.
By Matthew Mogul, Associate Editor, The Kiplinger Letter
May 23, 2007
The SEC will soon raise the bar on who can put money into a hedge fund. Not since 1982 has the Security and Exchange Commission adjusted the wealth standards for accredited investors -- those permitted in hedge funds. As a result, it still takes $1 million in net worth or $200,000 in annual income for individuals ($300,000 for couples) to be eligible.
When those limits were set 25 years ago, only 1.9% of U.S. households qualified as accredited investors, and there were only a few hundred funds to track. Today, some 9000 hedge funds exist worldwide, and because of inflation and the rapid rise of newly minted millionaires, about 8.5% of U.S. households qualify. The broader accessibility to the funds, known largely for their volatility, has sparked concern at the SEC that more and more accredited investors might not have the financial wherewithal to withstand potential losses.
New rules out by year end will limit hedge funds to about 1.3% of households by requiring people to have at least $2.5 million in assets, excluding equity in a home or business, in order to invest. The shrinking universe of eligible investors will force smaller funds to shut. The 500 biggest funds control 80% of all assets and rely mainly on institutional investors, such as insurance companies and endowments, for funding. The rest are left to compete for wealthy individual investors. And that'll get much tougher when the new rules take effect.
But close regulation of hedge funds is not likely. Sen. Chuck Grassley (R-IA) is pushing for stricter oversight of funds, similar to a proposed SEC rule that was struck down by a federal appeals court last year, but his bill isn't likely to pass.
Though lawmakers are interested in corralling hedge funds, everyone from former Federal Reserve Chairman Alan Greenspan to Treasury Secretary Henry Paulson to the White House has come out against it. What's more, Grassley's bill would have to go through the Senate Banking Committee, chaired by Sen. Christopher Dodd (D-CT). The majority of funds worldwide are headquartered in his state, and in the past, he has called hedge funds a "tremendous wealth-creation vehicle."
The hedge funds have just about taken over the stock market - small traders and investors are at the mercy of those gunslingers who act as a group to stop the little guy out of trades. The universe would be well served if they all went under. It will be interesting to see how these sharpshooters will react to redemptions (many have already postponed them) and how many have been involved in fraud.