ICI Letter to SEC Discusses Hedge Fund Investing

Washington, DC, July 2, 2003 - The Institute recently responded to an SEC request for additional information on hedge funds, submitting a letter and memorandum to the SEC. Based on a review of academic research, Institute economists conclude that investing in hedge funds requires financial expertise and advanced analytical tools that are typically beyond the reach of individual investors and most financial advisors.

Background
In May 2003, the SEC hosted a roundtable discussion of several issues relating to private, unregistered investment pools, commonly known as hedge funds. Representatives from the hedge fund industry and other interested persons participated in the discussion and offered their recommendations.

ICI Position
The Institute supports the SEC's decision to examine the regulatory framework governing hedge funds, and has stressed the importance of keeping unregistered hedge funds distinct from registered funds in order to avoid confusion and situations in which less sophisticated investors invest in funds that are not subject to the protections of the Investment Company Act.

The memorandum, prepared by two of the Institute's senior economists and based on a review of academic research, addresses the reported performance of hedge funds and concludes that many reports have substantially overstated return and significantly understated risk. Investing in hedge funds is a complicated task that requires financial acumen and advanced analytical tools. Given the current state of knowledge, hedge funds or hedge fund investment strategies would not seem to be warranted for average individual investors.

Related Links