Should Main Street Investors Test Their Luck in Private Equity?

Posted by Frank

June 2, 2008

The U.S. Markets are still staggering, but it seems the worst is behind us regarding the housing troubles. But can we expect big gains from our recent losses? I’m guessing we will experience slow growth for over a year with ups and downs. But many people aren’t waiting around for market recoveries, thanks to the growing accessibility of private equity.

Private Equity used to be something only the rich invested in. When I say rich, I mean rich. The Securities and Exchange Commission (SEC) actually determined that in order to invest in private equity (ie. hedge funds) an investor must be accredited, meaning they have at least one million dollars at the time of purchase. But the innovation in the markets is outpacing the regulation of the SEC. Now, everyday investors can test their luck in private equity by investing in ETNs as well as mutual funds that invest in public companies that own private equity firms in addition to individual stocks.

Fortress Investment Group (Ticker: FIG), recently became a publicly traded company allowing investors like your and me, to gamble in investments like hedge funds. By bypassing the accredited investor threshold publicly traded stocks that own or invest in private equity is a potentially dangerous investing option for many. Hedge funds are extremely sophisticated investment vehicles, way beyond the knowledge of most traders, but because of the chance of bigger gains, investors are pulling out of their safe securities and gambling with companies like Fortress.

Personally, I don’t see the allure to plop my hard earned money into companies whose investing strategies I could never understand. On top of not understanding exactly how my money is being put to use, funds that own private equity firms are far away from the profits. What I mean is, the profits are passed from the original investors to the publicly traded company to the mutual fund holders – twice removed from the original investment.

I prefer to be at peace with my investments and index funds are still my best friend. Do any of you disagree and think the small window everyday investors now have to private equity is one we should all be reaching into? $

Related articles you might be interested in: