Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Sunday, October 14, 2007

Shadab on Hedge Fund Markets

Fending for Themselves: Regulatory Reform to Create a U.S. Hedge Fund Market for Retail Investors, by HOUMAN B. SHADAB, George Mason University - Mercatus Center, was recently posted on SSRN.  Here is the abstract:

This Article shows that financially sophisticated retail investors in the United States likely suffer from undue economic losses because they are not permitted to invest in hedge funds. “Hedge fund” is a term of art for a diverse group of investment funds whose superior risk-adjusted performance owes much to their distinguishing characteristics and operations. Modern portfolio economics teaches that diversification helps to prevent investment losses, and the absolute return strategies employed by hedge funds can help to diversify an investment portfolio. However, U.S. federal securities law requires individual investors to be wealthy to qualify to invest in hedge funds. Although intended to protect investors, wealth-based qualifications prohibit sophisticated retail investors from benefiting from hedge funds and do not prevent unsophisticated investors from bearing hedge fund-like risks. The Securities and Exchange Commission has expressed a desire to increase access to hedge funds while maintaining investor protection, and the reforms proposed in this Article explain how to accomplish that goal. The proposed reforms seek to create a retail fund of hedge funds that privately raises capital through an underwriter who in turns lists the securities of the fund on an electronic trading platform accessible only by sophisticated investors.

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