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Is It Smart To Bring Hedge Fund Strategies To The Middle Class?

That's what Aspiration, a new personal finance startup, is aiming to do. But there's a real chance this could backfire, according to industry experts.

Posted on November 11, 2014, at 2:30 p.m. ET

Andrei Cherny, founder of investing startup Aspiration

Andrei Cherny, founder of investing startup Aspiration

Joining the ranks of the personal finance startup world is Aspiration, a new online investment service founded by former Clinton White House aide and financial fraud prosecutor Andrei Cherny. The site, which launched today, proclaims Aspiration will be "investing with a conscience" and has been billed as an "anti-Wall Street startup" due to its fee model that allows investors to pay what they want for its services, even if that means they don't pay anything at all.

Like its competitors Betterment, Wealthfront, and Learnvest, among others, Aspiration is targeting what it's calling the middle class, or people who have anywhere from $500 to $100,000 to invest. But where Aspiration appears to differ is that it is taking that money and investing in what Cherny calls "hedge fund-like" strategies that are usually exclusively available to accredited investors—those who earn $200,000 or more per year, or with a net worth north of $1 million not including the value of their home—who by law are the only people allowed to risk their money on a hedge fund.

"We are bringing to the middle class the types of investment strategies that have only been available to the wealthiest in our country," Cherny told BuzzFeed News. "Some of the first ones [to be made available] are liquid alternative products, hedge fund-like strategies in an mutual fund wrapper with very low minimum investment. Using some of these different kinds of financial tools, we're able to bring those kinds of strategies to people who haven't had access to them. We see ourselves as an investment firm, but for the 21st Century middle class."

Trying to improve the financial planning and prosperity of a wide swath of the country is certainly a noble pursuit. But hedge fund industry experts say the potential for this concept to backfire is high, especially given the complex nature of hedge fund investments and the amount of risk inherent to these kinds of bets.

"Replicating a strategy will not necessarily yield the same results as making an actual investment in the strategy," said Ron Geffner, a hedge fund attorney and partner at Sadis & Goldberg. "Hedge funds as an investment are designed to hedge a portfolio and not encompass a material portion of a portfolio. Given the presumption that these are not accredited investors, dollar amounts that would go into these strategies and the sophistication of those people do not seem to correlate to sound financial decision-making when using an alternative investment vehicle. Everybody deserves to have sound financial strategies, but certain strategies are better suited to those with a sophisticated financial knowledge. In other words, don't invest in something you don't understand."

To Aspiration's credit, Cherny says there will be an education component to the service to help investors understand how exactly to spend and save, as well as turn their money into more money over time. He also believes the steep fees hedge fund managers charge are a product of the greed that permeates the industry.

But even though Aspiration will charge little to no investment fees, Mitch Ackles, president of the Hedge Fund Association of America, says there is still a need to understand the risk that many hedge fund-like strategies possess, even if some managers are making headlines for their huge returns and resulting billion-dollar paydays.

"People need to understand the investment, and it should be based on their sophistication," Ackles said. "Having hedge funds available to retail investors just doesn't seem appropriate because it's a risky investment. Normal people, like my family, don't know what a sharpe ration is. People certainly want something they can't have, and when they look at those funds that perform very well that you see in the news, they want a piece of that. But I don't believe it's ever going to be appropriate for a hedge fund vehicle to be available to retail investors."

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