Goldman and the Defense of the Sophisticated Investor

In the world of the hedge fund, the concept of the sophisticated investor is just about as important as anything else.  Investment professionals, from money managers to brokerages, and every sort of “financial guy” in between, rely on the sophisticated investor in order to be able to chart courses to wealth that involve greater risk and complexity-of-instrument structure than that able to be withstood by Mr. and Mrs. 401(k) Investor.  It is, in truth, the very existence of the sophisticated investor that fuels much of what goes on in the global investment market.


We all know by now about the civil suit with which the SEC is attempting to use like a club and smack Goldman Sachs in the head.  While my naturally suspicious nature causes me to look for political underpinnings to the action (at least with respect to its timing), and sees some curious coincidence with the suit and the Obama administration’s efforts at financial regulatory reform, let’s leave a more in-depth examination of that angle (there are angles aplenty here) for another piece, and look at the idea that brokerages invoking the sophisticated investor should be tantamount to pulling out a “Get Out of Jail Free” card.


The key to every action like this lies in the level of transactional transparency that can be proved.  “Sophisticated investor” should not be an excuse to capture funds for a transaction that is manipulated in a way to the detriment of the investor participants, but if it becomes clear that the (ostensibly) aggrieved parties, ABN Amro and IKB, really did know what was going on, their obvious experience in the realm of complicated mortgage securities structures will work against the SEC’s portrayal of them as victims (indeed, we have learned that the SEC itself was divided on bringing these charges in the first place); the aforementioned firms know full well, among many other things, that a synthetic CDO transaction has to have both short and long positions, so the “shocking” short interest of Paulson and Co. may ultimately prove to be of little judicial consequence.


We’ll see.  In the end, few of the reasonable among us quibble with the idea of risk as long as appropriately-qualified principals are all on the same sheet of music.  The opportunity to step outside the box is part of the global wealth building effort, and the embrace of free market philosophy is the platform on which that opportunity sits.  However, the greatest of those opportunities remains reserved for the sophisticated investor, and so, assuming, appropriate foreknowledge, it is only reasonable that “he” bears the associated, unusual level of risk that always tags along for the ride.   



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Bob Yetman is an author of a variety of materials on personal finance and investing, as well as on topics of fitness and self defense, to include the just-released book Investor's Passport to Hedge Fund Profits (John Wiley & Sons, Inc.) and the new unarmed combat training DVD Thunderstrikes – How to Develop One Shot, One Kill Striking Power (Paladin Press).

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