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12 Mar 2007

Hedge Fund Analyst Claims Flaws in SEC Rules

Hedge Fund Analyst Justin Meyer submitted public comments on an SEC Rule Proposal that would change the standards for who could invest in a hedge fund, raising the minimum net worth values.

Meyer is the Senior research analyst for IncreMental Advantage, a Princeton-based best practices think tank that publishes and speaks on breaking developments in issues ranging from hedge funds to water utilities. He said, "The idea behind accredited investors is a good one, but the concept is flawed," said Meyer. "The SEC wants to equate net worth, or investable income with investment acumen. The two simply are not related."

In the existing public comments, there is a frequently-seen criticism of this proposed rule: the idea that investable income is equal to investment ability (or put another way, that money does not equal intelligence.)

Hedge funds are growing more and more sophisticated every day. There is no denying this, Meyer said, "It makes sense for the Commission to want to protect investors who might not be able to make a fully informed decision no matter how much information they are given, to ensure that those who are investing in funds that trade in high-risk ventures are not going to go broke if this investment fails."

Mr. Meyer continued, discussing what really mattered in hedge fund investing, saying that due diligence was the most important thing. "The rule is meant to ensure that someone investing in a 'risky' investment understands that risk and can absorb it if they lose their money."

"However, the key to understanding risk isn't having $5 million or $10 million. It's examining the investment and looking at who you are entrusting your money to, looking at how much risk they are taking on with the investment and how they manage the risk." Meyer said.

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