July 31, 2004
THE AMERICAN RIGHT TO TAKE ON RISK
I want to have the right to take on risk. Please do not deny me of this uniquely American privilege. Especially as risk can often times bring on big rewards.
Throughout history, Americans have succeeded by taking on risky strategies. It is the hallmark of our nation.
My suggestion is to strongly make efforts to let investors know that these strategies are extremely risky. However, please do not outlaw risk. Please do not outlaw potentially big rewards.
START-UPS are risky, putting millions of dollars into untested products, but no one makes them illegal. In fact, it allows our nation to be the leader in technology and medicine, helping lives around the world. We would not have many life-saving drugs today if companies such as Genentech or Amgen did not exist. Few other countries outside the US can create such life-saving treatments.
WARREN BUFFET is risky. He makes concentrated investments in a few companies, which according to conventional thoughts on investment, is risky. In his personal portfolio, he takes on many hedge-fund like strategies. Yet he has created billions of dollars in wealth for many retirees. Please do not outlaw strategies which the conventional-thinking crowd may believe is risky, while the people who are generating the best investment returns completely disagree. Would you prefer to believe an academic paper or the best investors in the world? Is diversification, which ultimately leads to index-like returns for extremely high management fees, truly more risky?
OUTDATED CONCEPTS OF RISK
Many at the SEC believes in many outdated concepts of risk. In reality, hedge funds are MUCH LESS RISKY than mutual funds.
SHORTING is considered risky, but it is NOT. If mutual funds were allowed to short during 2000, 2001, and 2002, many 60 year olds would not have to work many more years to make up for the billions of dollars lost to these investment vehicles. Please do not bow down to the wishes of CEOs and CFOs who want to outlaw shorting so they can cash out their billions in options each year. If senior citizens had the right to invest in hedge funds, which arguably attract the most talented investors in the world, less would be suffering due to outdated concepts of risk. The median return for hedge funds during this period is SIGNIFICANTLY higher than it is for mutual funds. They provide amazingly great protection against down markets, while the safest mutual funds lose billions in dollars for retirees.
TALENT MITIGATES RISK. Arguably, charging a performance fee attracts the most talented INVESTORS in the world, while a flat management fee attracts the most talented SALESPEOPLE in the world. This is true of any profession in the world sales, management, leadership, ANYTHING. The logic is obvious. If one person gets paid based on total assets managed and another gets paid on total returns, the person paid on assets will obviously spend more time on sales and marketing and attracting new investors than he would on actually making good investments.
VENTURE CAPITAL is risky. They do not allow me to take out my money for many years, even though I may have a family crisis or the fund is making extremely poor decisions. However, somehow this registration proposal does not include these types of funds, which are many-fold more risky. Please help me to understand the rationale, if the true purpose of this law is to help protect me from risk.
MUTUALY FUNDS SEEM SAFE, but they are RISKY. The Fidelity Magellan fund has a correlation of 99 with the SP 500. The only difference is that, due to high management fees, it has actually underperformed the index for several years see Timothy Middletons July 27 excellent MSN article. Please do not force me to spend my hard-earned money to pay high fees to closet index funds. How is a fund that must always be AT LEAST 90 long in ONLY equities more safe?
ALTERNATIVES
I agree, not every investor is qualified to understand that high reward comes with high risk. For these investors, I recommend the following:
DO NOT LULL INVESTORS INTO A FALSE SENSE OF SECURITY: Hedge funds will always be more risky but at the potential of more potential reward. MAKE REGISTRATION OPTIONAL. In this great nation of ours, we let the markets decide what is best. I would PREFER THAT ONLY A FEW FUNDS ARE REGISTERED. This would allow me to BETTER EVALUATE WHICH FUNDS ARE LESS RISKY. By making registration mandatory, it will make it much more difficult for me to assess which fund I want to put my hard-earned money in. Please do not tax me and force me to pay for a 100,000 a year compliance officer I neither want nor need. I would rather have the money in my savings account.
PROVIDE EXTREME DISCLOSURES: Require potential investors to sign a form that outlines the risks inherent in hedge funds. Please bring out the very worst horror stories available. Let investors know that there are very strong possibilities they can lose their ENTIRE investment. For those who are not willing to take on these risks, they will be informed and cannot complain to their local legislator about not being forewarned. No hedge fund wants these investors, who will sue at the slightest loss and cripple the greatest capital markets in the world.
Thank you very much for listening to my comments.