The Securities and Exchange Commission wrapped up a two-day meeting to consider what should be done to regulate hedge funds. The current system provides almost no oversight, and it allows only the very wealthy to take advantage of certain trading techniques that are denied to those less-well-off. The urge to improve supervision is naturally being resisted by most of the funds, but a simple reform, allowing anyone to invest in them would solve most of the problem.
Hedge funds are similar to mutual funds, but they are allowed to invest in virtually any instrument, and they can sell short as well as take a long position. In other words, they can profit from falling prices as well as rising ones -- a useful ability in the last couple of years. Their name derives from the fact that they started as funds to allow the very wealthy to hedge their financial risks. Over time, they have become speculative vehicles.
They are currently off-limits to most investors. The SEC requires a rather large amount of personal wealth (millions of dollars) before one is a qualified investor. In other words, multi-millionaires can sell a stock short and make more money; people worth $500,000 can't. The idea that being rich makes one an educated investor is non-sense at best.
Let anyone into a hedge fund. Let them make, or lose, money. No trading secrets have to be released to the public. Yet when John Q. Public discovers that the return of the average hedge fund in the last few years was not much better than the stock market itself, most of them will not want to invest. Then, the SEC can get on with what it needs to do -- catching those who break the rules rather than dreaming up rules that will merely put hedge funds off-shore and forever out of its reach.