December 22, 2006
Merely A Millionaire? Not Enough, Says SEC
Since it is stock taking time for almost everybody, I decided we’d follow tradition for once. Let’s have a look at the highs and lows of 2006. What was most characteristic about this year were the innumerable times the regulation word came up for discussion. The entire year was characterized by the undoing, redoing or modifying of regulations.
With hedge funds, you have to maintain a fine balancing between profit and greed. This is a lesson Amaranth managers and investors learned the hard way. Well, I guess I’m done with my stock taking. You cannot indulge too much in the past with something as dynamic as the hedge fund industry.
So what’s new now? Lots! Recently, the Securities and Exchange Commission, under its chairman, Christopher Cox, embraced its investor protection mandate. In simpler terms, the SEC’s just redefined who is rich and thereby severely limited the number of people who can invest in hedge funds. This rule, if passed could be the death knell for small funds who depend on rich people, and even the moderately rich, to get a start.
In simpler times, hedge funds could raise money from 100 accredited investors. The criterion for becoming investor was that you should have a net worth of $1 million (this includes the value of your home) or two consecutive years of income of $200,000 (or $300,000 for a couple’s combined income). The funds could also raise money from any number of qualified buyers who had assets of $5 million to invest.
As critics felt a change was needed to protect investors, the SEC proposed a new rule raising the standard to $2.5 million. The objective is to ensure that people investing in hedge funds had experience in the markets. This new development promises to be quite interesting… So let’s wait and watch what happens now.
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