I was discussing hedge funds with my uncle a few weeks ago and he was impressed that many had very high annual returns. Of course, with higher returns comes higher risk, as demonstrated by the massive losses hedge funds suffered during the 2008 stock market correction.
However, he was interested enough that he asked me how he could invest in a hedge fund. I explained that he would have to buy into one with a large sum of money, typically $1-$5 million dollars.
He was disappointed, not so much that the investment was out of his reach, but that the system seemed rigged against poor people. He didn’t like the idea that there were opportunities only available to the rich. Rich get richer, and all that.
Well, I didn’t know exactly what to say about that. Sure, having more capital will always open up more opportunities. Not many individuals have the savings to start a competitor to FedEx.
I considered trying to justify the minimum buy in by arguing that it lowered administrative costs of dealing with lots of clients. However, there are other investment vehicles, like close-end mutual funds that are exclusive, too.
Then today, I was reading a little bit about hedge fund history. Apparently, Regulation D of the Securities Act of 1933 requires that hedge funds be offered solely to “accredited investors.” What is an accredited investor? Someone with a net worth of $1,000,000. Another regulation limits the number of investors that a hedge fund can have.
In the end, this apparent market failure to offer investment options to the poor was (as usual) the doing of government.