SEC trying to raise restrictions on hedge funds

[DarkWaters]

According to Sebastian Mallaby's latest column, the United States Securities and Exchange Commission is trying to raise the minimum requirements for investing in hedge funds. The current minimum level of personal assets required to invest in a hedgefund is $1 million, including primary residence. The SEC has proposed to raise this to $2.5 million in assets, excluding primary residence. The columnist claims this to be ridiculous since investing in hedge funds are statistically less risky than odd lot purchases of stocks. I really wish that he focused more on how this is ridiculous because there is no moral justification to preventing individuals from voluntarily investing in legitimate ventures.

Edited December 20, 2006 by DarkWaters

[bigwig]

I'm always really surprised to learn that no one else is PO'd about minimums to be an "accredited investor." At first when I heard this term I thought you had to fill out some paperwork to let the government know that you fully knew what you were getting into, but then when I learned the truth I was completely shocked. Why is there no outrage that the government can forbid you to invest in X unless you have Y, where Y is whatever they feel like?

[softwareNerd]

I'm always really surprised to learn that no one else is PO'd about minimums to be an "accredited investor."

I think the reason for this is that there isn't enough demand for a change. Firstly, there probably aren't that many middle-income folk who want to put their money in a hedge fund. Secondly, many of the better hedge funds would probably create a restriction like this on their own accord, if the government was not disallowing it.

The law is definitely bad, in principle; just not enough voters who want to see it changed.

Similar restrictions are in place at a lower level too, though I'm not sure whether they're imposed by the government, by the exchange, or by brokers. For instance, if one wants to trade in options, one has to declare one's income, tell them how much experience one has in trading, etc. Then, they send you a booklet about the risks involved in option-trading, and some brokers want you to sign that you've read the book. Depending on your answers, you may not be approved for option-trading, or you may be approved for only certain types of trades.

One problem in a mixed economy is that the government often takes on some responsibility for people who have done something stupid. That wrong then necessitates the further wrong, where the government tries to preempt folks from doing stupid things.

During the Internet boom, a colleague asked me if I could trade options in my account. When I said I could, he asked: "If I give you $1,000, could you buy me some options?". I asked what options he wanted to buy. His reply: "Any...just buy a few of different companies, and we'll see if I hit the jackpot." Politicians know that people like this exist, as do people who run up excessive credit card debt, and people who take on higher mortgages than they ought. Politicians also know that they -- the politicians -- will get some of the blame when things go bad.

What we need is that the huge number of responsible people, who do not act like kids, become angry at the government bailing out those who do.

[Moebius]

Similar restrictions are in place at a lower level too, though I'm not sure whether they're imposed by the government, by the exchange, or by brokers. For instance, if one wants to trade in options, one has to declare one's income, tell them how much experience one has in trading, etc. Then, they send you a booklet about the risks involved in option-trading, and some brokers want you to sign that you've read the book. Depending on your answers, you may not be approved for option-trading, or you may be approved for only certain types of trades.

I'm a broker, and I'll tell you that the reason we do this is because when the customer fails to pay when they go over their margins, the brokers gets fucked. So basically if some random guy comes up to me and told me he wants to open an options account, I need to know that he would not just bail if he loses. It's really just an issue credibility.

[Moebius]

Secondly, many of the better hedge funds would probably create a restriction like this on their own accord, if the government was not disallowing it.

Definitely. Some of the hedge fund practices are involve extremely high risk tactics. It's just easier to deal with say, ten clients that each have a million dollars than a thousand clients who each have ten thousand dollars. Especially considering that millionaires generally are better informed investors and would not panic if the fund's net worth drops a little (and since they know how to make money are generally good repeat customers), while people who invest a few thousand dollars here and there often bolt at any sign of trouble (or call up customer service 10 times a day crying about how they lost their life's savings) -- which makes fund management very difficult.