Phil Goldstein Update

Hedge Fund Regulation 11 Jun 2008

Fortune released a great piece on hedge fund “iconoclast” Phil Goldstein this morning.  Like a big box store, the Goldstein saga has something for everyone.  Just when you thought he was done causing headaches for regulators and government officials, he emerges to launch new attacks on the institutions and regulations that he sees as both archaic and illegal.

The latest battle is over his First Amendment right to communicate with the public (see previous posting).  Current US regulations prevent investors under a certain wealth threshold from investing in unregulated investment funds (collectively “hedge funds” – although that’s a misnomer).  Goldstein contends that he has the right to free speech however, even if that speech is about his hedge fund.  Further, this right to free speech, argues Goldstein, is not in conflict with the SEC’s rules barring any particular group from actually investing in hedge funds.  Reports Fortune:

“He knew that many hedge fund managers stay awake nights worrying about the rules against marketing their funds to average investors [ed: been there]. The Investment Company Act of 1940, which regulates nonpublic funds, does not say anything about talking to the press, much less about Web sites. But some lawyers would tell Goldstein, if he were their client, that talking to Fortune about his firm is a crime. (You, the nonaccredited reader, would be the victim.) To protect themselves, hedge funds’ Web sites offer only bare-bones information to the public – no description of holdings and certainly no information about returns.”

Casual observers could be excusing for assuming Goldstein is some rich guy with a bad attitude.  But as Fortune points out, he doesn’t really fit the hedge fund manager stereotype.

“His lifestyle is hardly that of a Master of the Universe. He dresses in clothes from big-box stores. His wife works as a tour guide at the nearby Rockefeller estate, and he still gambles occasionally on poker or blackjack but quits as soon as he loses $100. ‘He doesn’t have other hobbies,’ says George Karpus, America’s biggest closed-end fund investor, who frequently works alongside him. ‘Most hedge fund managers love golf or yachts. None of that for Phil.'”

Goldstein’s crusade to allow more open communication is good for the alternative investment industry.  As we’ve suggested on these pages, regulatory muzzles contribute to misinformation about hedge funds.

In fact, we see the effects of this misinformation in this week’s debate about Warren Buffett’s bet with hedge fund manager Protege Partners.  Many individual investor side with Buffett, even though most institutional investors see value in hedge funds.  Fortune hits the nail on the head in the Goldstein piece…

“To Goldstein, it doesn’t make sense that the world can read letters written by Warren Buffett to his investors, but not those by investor Eddie Lampert, who runs a hedge fund.”

Maybe Goldstein could ask the (equally down-to-earth) Buffett about his views on this issue next time he bumps into him shopping for clothes at a big box store somewhere.

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