THE BLOG
03/18/2010 05:12 am ET Updated May 25, 2011

The Big Secret Wealthy Investors Don't Want You to Know

Wealthy investors are different from you and me. They have a secret they don't want anyone to know.

They are bigger suckers.

How can this this be?

They qualify as "accredited investors" who can invest in deals exempted from SEC registration. Without SEC registration, the sponsors of these deals can avoid troublesome filing requirements that require detailed disclosures about transparency, limitations on fees and liquidity.

This means they can be enticed to buy "alternative investments" like hedge funds and private equity deals.

How is that working for them?

Not well.

According to a web site that tracks hedge fund performance, since late 2006, 117 hedge funds at 71 fund families have "imploded." The fund mangers don't include just miscreants like Bernie Madoff. Carlyle Capital, Bear Stearns, Dillon Read (run by UBS) and JPM Partners all made the list.

The news was not bad for everyone. The sponsors of these funds did just fine. For example, the UBS-run Dillon Read Capital Management hedge fund closed after losing $124 million in the first quarter of 2007. When UBS closed its hedge fund group, it incurred costs of $300 million.

Where did that money go?

According to the New York Times, "...$200 million went to severance payments and other costs for the hedge fund manager and his team."

Now I understand.

The investors get clobbered. The fund manager and his "team" get rewarded.

Here's the ultimate irony.

When wealthy investors seek legal redress against the firms that put them into these deals, they are confronted with the defense that they are "sophisticated investors" who should have known better. It usually works.

The rest of us can learn a valuable lesson from the foibles of the rich.

They are no match for the securities industry.

We aren't either.

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