Hedge Funds on the path to Regulation
There is a March 20 article in Investment News titled SEC targets hedge funds for ‘preferential redemptions’. Many hedge funds (We should call them private investment funds, as not all of them actually “hedge”) offer custom terms for investors. Often investors who provide early seed are given a discount on management fees, or investors with size can negotiate favorable liquidity terms. It’s just the nature and flexibility of the structure. Of course it is still an investment and no one should be able to act on “inside” information so to the extent this is occurring in some private investment funds, that is not good. Some will say this is one more nail in the coffin of private investment funds, I don’t think that is completely the case. However, regulation is coming, probably fast, many more rules, much more transparency, and significantly more oversight and independent auditing.
Private investment funds are great vehicles, and can provide great investment benefits and diversification for investors. I do believe it is a small universe of investors. Mutual funds and ETFs are moving into the private investment fund space by offering “replication” strategies, and by offering true active management that provides hedging, and long/short strategies. Private investment funds will always be a great structure for those (few) investors looking to invest with asset managers who prefer the fee structure and exclusivity, and for non-traditional asset classes such as art, cars, or even guitars.