Types of Hedge Fund Investors

could be considered semiaffluent. At the risk of ignoring these differences,
it is still possible to distinguish this group from the high-net-worth in-
vestors in hedge funds. First, the semiaffluent investors are less likely to
have ready access to professional investment and legal advice. Second, the
semiaffluent investors are less likely to feel comfortable investing in high-
risk/high-reward strategies. Third, the semiaffluent investors are more
likely to invest in hedge funds indirectly, by investing in funds of hedge
funds that permit smaller minimum investments than single-manager
hedge fund minimum investments. Sometimes these funds of funds have
been registered and accept investments as low as $25,000.
Considering the many benefits hedge funds offer to investors, it is rea-
sonable to encourage the semiaffluent investors to move into hedge funds.
Securities law and practices often prevent hedge funds from accepting in-
vestments from this group. The Securities and Exchange Commission and
the Commodity Futures Trading Commission appear to be interested in
improving access to hedge funds by the semiaffluent.
Individual Retirement Plans, Including IRA,
401(k), Keogh
Individuals may invest money held in retirement accounts in hedge funds.
The owner of the retirement account must meet the same net worth and
income requirements that investors who invest in hedge funds outside a
retirement account must match. The retirement account does not need to
be large enough to satisfy the net worth requirements for accredited in-
vestor, qualified eligible participant, or qualified purchaser (see Chapter 8)
as long as the assets of the individual (both in and out of retirement ac-
counts) are sufficient.
The mechanisms for investing in hedge funds differ slightly, depending
on the type of retirement plan in question. For example, individual retire-
ment account (IRA) money must be held in a self-directed account (basi-
cally a brokerage account designed for IRA investing) and must find an
institution willing to act as trustee for the account. A corporation adminis-
tering a 401(k) plan may make a hedge fund option available to plan par-
ticipants. In each of these cases, the individual makes the decision to invest
in a hedge fund.
Hedge funds produce a large portion of return in the form of ordinary
income. Most hedge fund investors pay high marginal tax rates because
private placement laws severely limit access to hedge funds unless the in-
vestor has both a high income and substantial assets (see Chapter 8 for a
more complete discussion of the income and asset requirements typically
imposed on hedge fund investors).
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