As hedge funds have been anointed as “hot” by virtually every financial commentator, and as coverage of them has spread from the financial media to daily newspapers, consumer finance publications, and Web sites, the notion of hedge funds descending from their perch as a rarefied product to something within reach of the retail investor has drawn much discussion and debate.
With the word out that some hedge fund products are letting in investors for as little as $25,000, the term that arises from the Securities & Exchange Commission and other interested observers is “retailization.” A 2003 SEC staff report stated that “the increased number of retail investors qualifying as accredited investors raises our concern that hedge funds and broker/dealers might begin to seek out these investors as a new source of capital.”
In April 2003, SEC Chairman Bill Donaldson, testifying before a U.S. Senate committee, mentioned the concept of “middle-class hedge funds” while referring to the lower investment minimums of new registered hedge funds. He then added, “But there is currently no federal requirement for a minimum investment, and it is possible that funds might seek to lower [their minimums], making these types of funds available to a greater number of individuals with even less capital.” He noted that funds of funds allow smaller investors entr?e into a vehicle in which they might not normally invest because of high minimums or structural or regulatory issues with the fund.
Regardless, the meaning of retailization is relative. Within the hedge fund industry, the consensus seems to be that even if hedge funds are destined to go retail, they aren’t there yet, as the majority of registered hedge fund assets are sourced via the advocacy of investment advisors and financial intermediaries to their clients, not from self-directed investments from individual investors.
Phil Duff, chairman and chief executive of FrontPoint Partners LLC in Greenwich, Connecticut (which does not manage any registered, low-minimum funds, by the way) says that while he does not perceive a tide of retailization swamping the hedge fund landscape, the traits of hedge funds that make them appealing to the wealthy will eventually bring them to more of the general public. “It will be a trend further down the road–five to 10 years,” he says. “The issues that average investors have, for non-correlated returns, are as important to them as they are for corporations or institutional investors.”