Retail Hedge Fund Investors Under Scrutiny In US

by Philip Morton, Investors Offshore.com

02 May 2003

In the run-up to the forthcoming round table discussion organised by the SEC to gather information on the hedge fund industry, conflicting reports on the attitudes of retail investors towards the risky investment vehicles have appeared.

Although the US Securities and Exchange Commission chairman, William H. Donaldson has warned of the increasing 'retailization' of the industry, a recent Wall Street Journal report suggested that for smaller investors in the UK and elsewhere, the novelty of hedge fund investment is wearing off.

'Funds of hedge funds raise special concerns because they permit investors to invest indirectly in the very hedge funds in which they likely may not invest directly due to legal restrictions,' Mr Donaldson observed in a recent speech, and indeed in the United States, these types of funds appear to be gaining in popularity, according to reports.

However, the Journal observed on Tuesday that:

'Hedge funds have been aggressively marketed as the investor's panacea, but despite performing better than traditional asset classes over the past three years of bear markets, uptake has been slow - partly because they are still tainted by the 1998 collapse of Long-Term Capital Management.'

Revealing that the vast majority of international hedge fund investment still comes from institutions rather than from mass affluent investors, Jacob Schmidt, director of hedge fund rating and research at London's Allenbridge Hedgeinfo told the WSJ that:

'I don't blame retail investors for not buying hedge funds. They have been sold on the bad investments so many times.' He continued:

'It's still better than investing only in traditional, long investments - but this is an investment that needs good advice.'

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