Time to raise the bar on hedge funds?

SEC building

TEXT OF STORY

MARK AUSTIN THOMAS: The Securities and Exchange Commission meets today to discuss hedge funds. You might recall what happened the last time the agency tried to reign in these sometimes risky investments. A federal court threw out a rule that required hedge fund managers to register with the SEC. Today regulators go back to the drawing board. Marketplace's Amy Scott reports.


AMY SCOTT: How rich should you have to be to risk losing a lot of money? The SEC is grappling with that question.

To invest in a hedge fund, you currently have to earn at least $200,000 a year or have a net worth of at least $1 million. But that definition is almost a quarter-century old and it includes the value of your house.

Roger Ehrenburg runs the financial information service Monitor 110. He says inflation and the recent run-up in home prices have rendered that definition obsolete.

ROGER EHRENBURG: A couple million dollars just isn't that much anymore. I know lots of people that have a net worth of $2 million that are incredibly unsophisticated financially, so that it really doesn't provide, in my mind, a bar.

The SEC is considering raising the bar.

SEC chairman Christopher Cox says he's concerned about the so-called retailization of hedge funds. The recent collapse of Amaranth Advisers highlights the risk for people who don't know what they're getting into. Investors in that hedge fund lost billions of dollars because of bad bets on the price of natural gas.

Still, others say why should smaller investors watch from the sidelines while the rich get richer?

David Friedland manages private funds that invest in hedge funds. He worries that raising the wealth requirement would cut off some of his customers.

DAVID FRIEDLAND: And these are the types of investments that should be made available to a broader category of investor. They're far less risky than traditional mutual funds and stock investments.

He says that' because they can make money whether the stock market is up or down. Some say there's a better way to protect investors, large and small.

Under current law, hedge funds can't advertise. Attorney Paul Roth says that prevents them from talking to the press or sharing information that could help people make smarter investments.

PAUL ROTH: If we want transparency, we ought to change the rules to provide as much transparency as possible. And one of the ways you do that is allow people to have open websites with respect to their funds, what their performance is, who their people are. Under the rules as they presently exist, you can't do that.

For those of us who aren't worth a million bucks, there may be another way to tap into the hedge fund boom: Last month hedge fund manager Fortress Investment Partners filed to go public.

That means anyone will be able to buy shares in the company on the open market and those notoriously secretive hedge fund managers will have to open their books.

In New York, I'm Amy Scott for Marketplace.

About the author

Amy Scott is Marketplace’s education correspondent covering the K-12 and higher education beats, as well as general business and economic stories.

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