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Answer:
Dear
Tom,
First
of all, yes. You're absolutely right. The Securities
& Exchange Commission (SEC) recently voted to require
hedge funds to register with the regulatory agency.
Second,
neither BUYandHOLD nor our parent company, Freedom
Investments, sells shares of hedge funds.
The
SEC vote...
According
to the SEC's announcement, it was a close vote: 3
to 2. The Chairman, William Donaldson, who is a Republican,
voted for the change. The other two commissioners
who voted yes are Democrats; the two that voted no
are Republicans.
Federal
Reserve Chairman Alan Greenspan and Treasury Secretary
John Snow (who are not members of the SEC) had come
out against the new rule, stating that free markets
work better. Others have pointed out that the dishonest
hedge funds, the so-called fly-by-nights, typically
have assets under the $30 million benchmark (see item
#1 below) covered in the new regulations.
What
the new rule requires...
The
new regulation, which goes into effect in 2006, makes
four primary changes:
(1)
It requires all hedge funds with assets above $30
million and with at least 15 U.S. clients to register
with the SEC.
(2)
It gives SEC inspectors the right to audit hedge
funds.
(3)
It requires hedge funds to hire a chief compliance
officer.
(4)
It requires hedge funds to formulate clear plans to
reduce fraud.
What
this means for the funds...
Hedge
funds, primarily geared to the wealthy, have been
operating in a fairly regulation-free environment
and have not been required to register with the SEC.
So this new ruling is seen as a negative for the industry
but a real positive for the investor.
Some
facts that were revealed...
In
the process of studying the industry as a basis for
the new rule, it was learned that:
-
About 40% of hedge funds are already registered
with the SEC.
- Nevertheless,
fraud has cost investors millions of dollars over
the years.
- The
industry has grown to approximately $1 trillion.
- There
are about 7,000 such funds today vs. about 4,000
in 2000.
- Less
sophisticated investors have begun to invest in
the funds.
For
More Information
Shares
of hedge funds are sold primarily to investors who
have a net worth of at least $1 million. They are
allowed to bet on securities that rise or fall in
price and they can use leverage to boost their returns.
To
read a previous column on how hedge funds work, click
HERE.
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