Based on a July vote from the U.S. Securities and Exchange Commission, starting today hedge funds, along with private equity and venture capital firms, can now solicit the public through advertisements - an action that was previously banned. While I am not a fan of hedge funds across the board as an investment vehicle, I am in favor of this rule change. Here’s why.
Rules Don’t Stop Fraudsters: If you’ve ever watched American Greed (and if you haven’t, you should), you know that there are no shortage of individuals looking to scam others out of money. Many of those use Ponzi schemes, fake investment vehicles and promises of impossible returns to lure unsuspecting individuals to make what they think is a winning investment.
However, someone who would perpetrate a fraud like that isn’t going to be deterred by an advertising rule. Look at how long the SEC investigated Bernie Madoff for—not to mention that his investors were “sophisticated”.
A thief will find a way to be a thief. There’s no need to punish legitimate firms for the potential actions of those who will end up breaking many other laws regardless.
A Hedge Fund Investment isn’t exactly an “Impulse Purchase”: Hedge funds are typically illiquid investment vehicles that require a substantial minimum investment. Many of these minimums are at least $1 million, while some of the smaller ones allow for six-figure investments.
At this level, this is not an “impulse purchase." Someone with an extra million hanging around won’t look at an advertisement in The Wall Street Journal, on Twitter or in their email box and make the decision to spend seven-figures based solely on that. Additionally, most individuals with that much liquid capital are already accredited investors.
Accountability is a Good Thing: I am sick and tired of the government making laws that tell us that we are too stupid to take care of ourselves. If we are continually told that we are stupid and that the government needs to take care of us, we start to act that way. Just like a parent needs to eventually let a child make their own decisions and sometimes, mistakes, adults need to do the same—and there needs to be accountability.
If you put your money in an investment vehicle that you don’t understand, it should be on you; just like it is your fault- not the lending bank’s- if you take out a mortgage that you can’t afford. Knowing that there are consequences for your actions will lead to better decision making, which benefits us individually and collectively.
We Should Be Completely Free to Be Stupid: We live in a free country where we ostensibly have the right to do what we want with our money.
We can buy gold-plated toilets and plastic fish that sing. We can go to Las Vegas and bet it all on black at the roulette wheel.
If we are free to do all kinds of stupid things with the money that we have earned, there should be no reason why we shouldn’t have that freedom to be stupid with our investments. Whether it’s putting money into a rabbit farm, a shop down the street that sells only red sneakers or a hedge fund, if that’s what we want to do with our money, we shouldn’t be told that we aren’t sophisticated enough to do so.
Now, if you want to be successful as an investor, I advocate investing in stocks, businesses or other assets that you understand, that have outstanding management teams and strong track records. But I also advocate not buying a bunch of crap that you don’t need or can’t really afford either. And while I will advocate and advise in that direction, under no circumstances do I think that it’s appropriate to legislate that behavior from you or anyone else.
The bottom line is that while I neither think that hedge funds make sense for the average retail investor, nor believe that they will be successful in raising significant funds with advertising, that doesn’t justify having a legal ban on it.
Let the games-and advertising-begin.
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