Rich enough for skill?
Rich enough to REDUCE risk? Net worth sufficient to be ALLOWED access to skilled investors? Why should anyone saving for retirement be excluded from the best portfolio managers? What wealth is required to be considered "sophisticated" enough to invest in hedge funds? How to decide those permitted to preserve wealth, increase returns and lower risk over the long term? A free market surely means access to quality money managers REGARDLESS OF WEALTH. The brain drain to hedge funds is obvious.
Have long only funds "protected" the mass affluent in down markets? What about the leverage being offered to subprime borrowers to speculate on real estate and the absurd alchemy used to transform such loans into supposedly AAA "securities"? Why is it legal to market high interest loans to borrowers who will not be able to pay it back the next time real estate hits a drawdown but hard working future retirees are precluded from quality money managers? What is the "accredited investor" level required to enter a Las Vegas casino?
Hedge funds are too risky for Mom and Pop? The evidence is the opposite. An S&P 500 index fund has abysmal Sharpe ratio. Some even want to increase(!) the net worth to be considered "smart" enough to invest in hedge funds. Check the FACTS on performance before "sheltering" Joe Sixpack from skill and attempting to further regulate an industry where the necessary regulatory protections are ALREADY in place.
Some airplanes crash so stop people flying? Regulators allow people to drive cars but each day many die on our roads. Ban cars? What does "too risky" mean? The standard deviation of returns? Equity funds generally have volatilities as high as 20. For most good hedge funds the metric is lower and diversified funds of hedge funds can get under 10. By the academic measure of risk, proper hedge funds are SAFER than the hazardous investment products currently authorized! If retail investors should be protected, regulators would urge Mom and Pop INTO hedge funds.
I don't regard volatility as an informative measure of risk. The Sharpe ratio and the beloved Value at Risk (VaR) based on historical variances are NOT useful. I prefer to define risk as something bad happening and maybe the SEC does too. But again PROPER hedge funds are better with their diverse range of strategies and control of the downside. Surely a 50% drawdown in the S&P 500 is bad? Isn't losing 80% in the Nasdaq very bad? Index funds spending 6 years below last century's high water mark is scandalous? And isn't making absolute returns good? More damage has happened to the traditional part of investors' portfolios than the alternatives part in recent years. Sure, very rarely a poorly managed "hedge fund" might blow up so you need thorough due diligence as with any investment.
Does the SEC mean fraud risk? As the many successful prosecutions prove, financial scams are against the law. The legislation is already sufficient to punish investment fraud and securities law violations. There always will be people around trying to sell questionable stocks, land, bridges and, yes, dodgy hedge funds. Should we therefore stop people buying houses because there have been real estate swindles? Should we ban people from buying cars because of economical-with-the-truth car salesman? Fraud occurs in all business sectors but retail investors should be allowed to buy the hedge funds they need.
Incompetence risk is when there is no intention to steal the money, it just gets lost legally like with Long-Term Capital Management or Amaranth. The SEC permits people to purchase individual stocks despite the fact that some stocks go to zero every year. Common sense and diversification protects portfolios. Nowadays with proper hedge funds there are many checks and balances as well as alignment of interests with investors. The managers' own money should be at stake, professional seed investors conduct ongoing thorough due diligence while fund administrators, prime brokers and other service providers all have a vested interest in avoiding headline risk by checking up on their hedge fund clients.
That incompetent traders and criminals also exist in the hedge fund world does not in any way obfuscate the ESSENTIAL need for every investor, large and small, to put a SUBSTANTIAL portfolio percentage into well managed hedge funds. If the SEC is really worried about RISKY funds sold to the masses it needs to start by looking hard at the products they currently permit and abolishing this accredited investor nonsense.
I know an institutional investor doing a mediocre job of "managing" over a $1 trillion for its pension beneficiaries yet I also know individuals with below average net worth whose financial knowledge is enough to evaluate hedge funds. The naive large investor is allowed to invest in hedge funds but the informed individual is not. Why?
Have long only funds "protected" the mass affluent in down markets? What about the leverage being offered to subprime borrowers to speculate on real estate and the absurd alchemy used to transform such loans into supposedly AAA "securities"? Why is it legal to market high interest loans to borrowers who will not be able to pay it back the next time real estate hits a drawdown but hard working future retirees are precluded from quality money managers? What is the "accredited investor" level required to enter a Las Vegas casino?
Hedge funds are too risky for Mom and Pop? The evidence is the opposite. An S&P 500 index fund has abysmal Sharpe ratio. Some even want to increase(!) the net worth to be considered "smart" enough to invest in hedge funds. Check the FACTS on performance before "sheltering" Joe Sixpack from skill and attempting to further regulate an industry where the necessary regulatory protections are ALREADY in place.
Some airplanes crash so stop people flying? Regulators allow people to drive cars but each day many die on our roads. Ban cars? What does "too risky" mean? The standard deviation of returns? Equity funds generally have volatilities as high as 20. For most good hedge funds the metric is lower and diversified funds of hedge funds can get under 10. By the academic measure of risk, proper hedge funds are SAFER than the hazardous investment products currently authorized! If retail investors should be protected, regulators would urge Mom and Pop INTO hedge funds.
I don't regard volatility as an informative measure of risk. The Sharpe ratio and the beloved Value at Risk (VaR) based on historical variances are NOT useful. I prefer to define risk as something bad happening and maybe the SEC does too. But again PROPER hedge funds are better with their diverse range of strategies and control of the downside. Surely a 50% drawdown in the S&P 500 is bad? Isn't losing 80% in the Nasdaq very bad? Index funds spending 6 years below last century's high water mark is scandalous? And isn't making absolute returns good? More damage has happened to the traditional part of investors' portfolios than the alternatives part in recent years. Sure, very rarely a poorly managed "hedge fund" might blow up so you need thorough due diligence as with any investment.
Does the SEC mean fraud risk? As the many successful prosecutions prove, financial scams are against the law. The legislation is already sufficient to punish investment fraud and securities law violations. There always will be people around trying to sell questionable stocks, land, bridges and, yes, dodgy hedge funds. Should we therefore stop people buying houses because there have been real estate swindles? Should we ban people from buying cars because of economical-with-the-truth car salesman? Fraud occurs in all business sectors but retail investors should be allowed to buy the hedge funds they need.
Incompetence risk is when there is no intention to steal the money, it just gets lost legally like with Long-Term Capital Management or Amaranth. The SEC permits people to purchase individual stocks despite the fact that some stocks go to zero every year. Common sense and diversification protects portfolios. Nowadays with proper hedge funds there are many checks and balances as well as alignment of interests with investors. The managers' own money should be at stake, professional seed investors conduct ongoing thorough due diligence while fund administrators, prime brokers and other service providers all have a vested interest in avoiding headline risk by checking up on their hedge fund clients.
That incompetent traders and criminals also exist in the hedge fund world does not in any way obfuscate the ESSENTIAL need for every investor, large and small, to put a SUBSTANTIAL portfolio percentage into well managed hedge funds. If the SEC is really worried about RISKY funds sold to the masses it needs to start by looking hard at the products they currently permit and abolishing this accredited investor nonsense.
I know an institutional investor doing a mediocre job of "managing" over a $1 trillion for its pension beneficiaries yet I also know individuals with below average net worth whose financial knowledge is enough to evaluate hedge funds. The naive large investor is allowed to invest in hedge funds but the informed individual is not. Why?
© posted by Hedge Fund on 5:01 PM
<< Home