NASD Concerned At Hedge Fund Selling Practices

by Phillip Morton, Investors Offshore.com

19 August 2005

The United States brokerage regulator, the NASD is reportedly investigating the way hedge funds are being marketed, amid growing concern that some companies are targeting smaller investors who may lack the necessary wealth and investment expertise for these currently loosely regulated private investment pools.

According to a report by Bloomberg, the NASD, which oversees around 5,200 brokerages, sent a letter in June to about ten large investment banks asking them what warnings they gave investors when selling them hedge fund products with a minimum investment of $50,000 or less. It is understood that Citigroup Inc., Merrill Lynch & Co. and UBS AG were among the firms contacted by the brokerages watchdog.

The NASD is looking for evidence that some firms have been pressuring private investors into making unsuitably risky or expensive investments. However, the letter stressed that the enquiry "should not be construed" as an official investigation, Bloomberg reported.

Barry Goldsmith, NASD executive vice president of enforcement, was quoted by Reuters as noting that: "The marketing and sales of hedge funds to individual investors has been an ongoing focus of NASD. We are continuing to look at issues in this area, but cannot comment on any of the specifics."

Traditionally, hedge funds have been strictly off limits to all but the wealthiest of investors, and the usual minimum investment limit is $1 million. However, demand for these types of investments, which can allow investors to ride out periods of slumping stock prices, has grown apace in the last two years, and an increasing number of hedge fund products enabling investors of more limited means to gain access to alternative investments are being developed; for example, funds of hedge funds invest across a basket of hedge funds in order to dissipate investment risk. Such vehicles may have minimum investment limits as little as $10,000, depending on the jurisdiction in which they are sold.

Recommended