Hedge Fund Reader : Hedge Fund Regulation

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May 27, 2006

Hedge Fund Regulation

Hedge Fund regulations in the US are not new for the investment companies. Investment companies that are registered with the US Securities and Exchange Commission (SEC) are subject to strict limitations on the short selling and use of leverage. These are essential to many hedge fund strategies. In order to implement these strategies in an effective manner, hedge funds elect to operate as unregistered investment companies. Interests in a hedge fund cannot be offered or advertised to the general public. They are limited to individuals who are accredited investors and qualified purchasers.

As per the guidelines, accredited investors must have total incomes of over US$200,000 per year or a net worth of over US$1,000,000. Similarly, qualified purchasers must own at least US$5,000,000 in qualified investments. A hedge fund is limited to 499 investors. The hedge funds having fewer investors may see few government-imposed restrictions on their investment strategies. There is a presumption that hedge funds are pursuing more risky strategies. The ability to invest in these funds is restricted to wealthier investors who have the financial reserves to withstand a possible loss.

The new rule implemented by the SEC in February 2006 requires most hedge fund advisers to register with the SEC as investment advisers under the Investment Advisers Act. It is applied to firms who manage in excess of US$30,000,000 or more investors. The SEC currently does not have the staff to monitor the estimated 8,000 US and international hedge funds. However, it is forming internal teams that will identify and evaluate irregular trading patterns for individual investors.

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May 27, 2006 in Regulation | Permalink