$2.5M Hedge Fund Floor May Help - Or Hurt - Small Fry

The President's Working Group (PWG) on Financial Markets has not pushed for new hedge fund regulations -- except for a rule that would raise the minimum net worth of investors to $2.5 million from $1 million. Even some PWG critics agreed with the suggested floor -- but Magnum Funds' David Friedland decried the "discrimination." The debate raged, on "Morning Call."

Moody's Managing Director Gary Witt agreed that the bar should be raised. He noted that the PWG report drew a line between "sophisticated" investors and others -- and while that term was not defined by dollar amounts, he told CNBC's Mark Haines that proposals stabilizing systemic risk and maintaining "appropriate" risk levels, can be pegged to net worth. He warned that smaller investors, driven to start redeeming shares at a quickening pace, could bring on a dangerous "cascading effect" of divestment.

But Friedland, Magnum's U.S. operations president, took issue. He said it's not Congress' place to "tell anybody they're not eligible" to invest in the burgeoning hedge-fund arena. He cautioned that such "discrimination" not only stiffs the small investor, but could stifle "penny stocks" or "whatever other investment you might deem to be risky." Further, Friedland said a higher entry floor will hurt "smaller hedge funds" that rely on such smaller investors.