Decreasing Barriers to Access in Hedge Fund Investing

Everyone, please listen up, because I guarantee in the next ten minutes you will learn more than you have all semester. Whether you are interested in finance or not, it is crucial to know at least a little bit about it, because finance affects us all. Now, imagine for a split second that you knew the ins and outs of the financial markets. Consider the idea that just access to certain information can make you millions, if not billions of dollars, in just a snap of a finger. Today, I will be discussing how decreasing barriers to access in hedge fund investing can significantly help the US economy. 

Now, let me break it down for you and I don’t mean realistically, although I definitely could and there would be a few laughs here and there, oh who am I kidding, I know everyone would be laughing but I guess I will just have to save my terrible dance moves for another day, because today I am going to break it down figuratively.

Investing is like tennis, the bigger the risk, potentially the greater the return. For instance, when you serve a ball with great pace, you take a substantial risk of the ball being out. However, the return on a serve can either be detrimental or substantial, just like investing. When you invest in a particular stock, bond, or fund whatever it may be, you are risking your capital to receive a return on your investment. The more risk you take, in tennis as well as in your investments, potentially the greater returns you will receive.

Just to show how significant hedge funds are, according to the world-renowned Harvard economist, Kenneth Rogoff, “It’s quite astonishing how much money people make in the hedge fund business and the private equity field, and how well-off affluent families are.” Now let’s get into it, first things first… how do the rich keep getting richer? Let me blow your mind for a second, what if I told you it was as simple as having access to certain information that not everyone else has access to! Let me elaborate, wealthy investors often invest in hedge funds. They do this for several reasons, one being access to exclusive investment strategies and information, two being diversification, and three being, potentially high returns. Now let’s back up for a second, you might be thinking what exactly is a hedge fund? A hedge fund is quite simple, yet it is arguably one of the most significant parts of our entire economy. 

The name hedge fund is derived from an investment strategy called hedging. In finance, hedging refers to mitigating risk while increasing returns on investments despite volatile markets. A hedge fund is typically a limited partnership of private investors whose capital is handled by fund managers. Hedge fund managers employ a variety of tactics such as leveraging and trading non-traditional assets to increase the potential return on an investment. So, why are hedge funds important? And, who is investing in these funds? This particular investment strategy can only be accessed by the people who invest in hedge funds, wealthy individuals. At this point, you might be thinking, why can only wealthy individuals invest in these funds? The plain and simple answer is, that you can only invest in hedge funds if you are an accredited investor. But, who’s considered to be an accredited investor? An individual is deemed to be an accredited investor if they have earned at least $200,000 per year over the past two years and anticipate doing so again in the following year, or if they have a net worth of at least $1 million. Now let’s think for a moment… 

With lower-income investors being unable to invest in hedge funds, they are restricted from taking substantial financial risks, which in turn limits their potential returns. That’s why decreasing access barriers to hedge fund investing can be extremely beneficial. If the Securities and Exchange Commission, whose job it is to protect investors, would allow non-accredited investors to invest in hedge funds, these lower-income investors can potentially acquire the same benefits that wealthy individuals do. 

Seems like a win-win to me, right? Well, then why does our government only let wealthy individuals invest in hedge funds? Some may say it’s because lower-income individuals can not afford to potentially lose what they have invested. In some cases that might be true, but in this instance I believe it is complete and utter BS. Do we not see low-income individuals taking high risks daily whether that be gambling in a casino, buying a ticket for the lottery, or investing in penny stocks? Where was the Securities and Exchange Commission then? Nowhere to be found. So let me ask you all this, how could the rich get richer if they only had the same investing strategies that lower-income individuals have… It’s clear, they most likely would not get richer. And, without wealthy individuals, our economy would plummet, because wealthy individuals frequently fund startups, organizations, and businesses. Their monetary contributions and risk-taking tendencies boost the economy by generating jobs and encouraging innovation. If the number of wealthy individuals who make these investments decreases, jobs and businesses will decrease as well, ultimately negatively affecting our economy. 

Now I want you to all close your eyes and imagine for a split second that everyone had the same access to investment strategies, regardless of their wealth class, or status. Now open your eyes. What do you think the outcome would be? I believe our middle class would not be diminishing if everyone had the same access to investment strategies. I know, I know you’re probably thinking, “What do you mean, Vaska, the US’s middle class is diminishing? There’s no way”...Well, unfortunately, yes, there is a way. The income gap has grown tremendously during the last few decades. And here's why; salaries for the middle class have been pretty constant, meanwhile, there has been an enormous increase in income for the wealthiest individuals. This economic divide results in the middle class diminishing.

Just to prove how serious the United States economic divide is, I am going to provide the class with a stat. A financial article published on September 25th, 2023 by Forbes the leading global media company for business, states, “The top 10 percent of Americans held nearly 70 percent of U.S. wealth, meanwhile, the bottom 50 percent owned only about 2.5 percent of wealth in 2021.” Which is absolutely absurd in my opinion.

Now, let’s look at this from a college student’s perspective. So we can better understand how drastically the US economy is changing. Attending a US college, for instance, Pepperdine University. Is typically quite expensive. Financial aid is only given to low-income students, meanwhile, wealthy students do not need financial aid. But, what about middle-class students? You can say they are quite unlucky if they have not received a scholarship whether that be for academics or sports. They will most likely have to take out student loans which they will be paying back for quite a few years. So, let me ask you this, why do you think the Securities and Exchange Commission restricts lower-income individuals from investing in hedge funds? Is it possible that the government will not let unaccredited investors invest in hedge funds because the government believes that if everyone has the same access to investing strategies it would deteriorate the position of the wealthy segment of our society? 

Whether you believe it will hurt or help the economy, the just thing to do is to not restrict lower-income individuals from being able to invest in hedge funds. Everyone deserves the opportunity to have financial freedom. Now is the time, when we should be asking ourselves, how do we enact this policy? Since this is a topic that is not typically discussed, we can spread this specific policy throughout social media and once it has gained the public’s attention we can petition to have the Securities and Exchange Commission change their regulations on hedge funds.