Last week Bloomberg> wrote about IGA Automobile LP, an investment fund aiming to buy $150 million worth of classic cars. Backed by Pink Floyd drummer Nick Mason, the fund is targeting annual returns of 15% by trading in collectable Bentleys, Bugattis and Ferraris. A "blue chip" index of classic motors has risen 67% over the past three years, compared to a 6% drop in the S&P 500.
Blue Chip Index of the Automotive A-List
"Blue Chip" index of the most sought after collectible automobiles of the post-war era.
Source: Hagerty's Cars That Matter
But you couldn't invest in this unquestionably high-risk asset even if you wanted to. Why? Regulation. Citing "the potential cost and regulatory issues for both covering the SEC and tax authorities," the fund is not being offered or sold in the United States.
Many investors are also likely frustrated at not being able to invest in Facebook -- one of the fasting growing businesses of all time. Thanks to the SEC, only "accredited" (read: rich) investors are permitted to buy into private companies like Facebook, and even then rules limit the number of potential backers, as well as the company's ability to promote or advertise the private offering.
The regulatory burden, and fear of litigation, ultimately prompted Goldman Sachs (GS)
Regular investors have also largely been kept out of hedge funds, which in aggregate have far outpaced the S&P 500 index funds that dominate most 401(k) plans.
We last wrote about the benefits of hedge fund strategies a year ago. Since then, investor interest has spiked. Data from Hedge Fund Research (HFR) indicates 2010 ended with the biggest quarterly increase in hedge fund assets ever, now amounting to a total of nearly $2 trillion. Given their outperformance, it's not hard to see why.
Just like the car fund or Facebook, the SEC purposefully makes this asset class difficult to access. Again, hedge funds are limited to accepting only wealthy investors. They're prohibited from advertising or soliciting business -- heaven forbid the public might be made aware of or consider what's actually been a comparatively good investment. SEC regulation makes that decision on your behalf.
Hedge Fund Index Hits New Highs
Credit Suisse Liquid Alternative Beta Index (CSLAB) Daily since 12/1/1997
Source: Credit Suisse
What's worse, the SEC doesn't seem to have a clear idea of who it's protecting and from what. Consider: SEC rules now limit hedge funds to an arbitrary 99 "accredited" investors with million dollar net worth's, yet new exchange-traded products like IQ Hedge Multi-Strategy Tracker ETF (QAI)
An SEC spokeswoman declined to comment.
The point is, whether it's Facebook, classic cars, a hedge fund or plain vanilla index fund, all investors regardless of their wealth should have the same right to make up their own minds about where to allocate their money. Regulation of stock investors, issuers or markets themselves only gets in the way.
The only winners here are regulators: Before the spending impasse in Washington, the SEC had received an 18% budget boost to $1.3 billion to help enforce its growing list of regulations.
Who loses? The rest of us. As was recently pointed out in a Wall Street Journal editorial, "Thanks to SEC regulation and the litigious atmosphere it fosters not to mention Sarbanes-Oxley's onerous burdens on corporate executives the whole capital formation process is moving offshore. The U.S. share of total equity raised in the world's capital markets is shrinking, while the number of U.S. companies listing their shares for trading exclusively in foreign markets has risen steadily for the past five years."
Thanks for nothing.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC