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Hedge Funds

Hedge Fund Regulation

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Investment companies that are registered with the United States Securities and Exchange Commission or SEC are subject to rather very strict limitations on the short-selling and use of leverage that are essential to many hedge fund strategies. For this along with other reasons, hedge funds often choose to operate as unregistered investment companies.

As a result of this, interests in a hedge fund cannot be offered or advertised to the general public, and are limited to individuals who are both accredited investors, that is investors who have total incomes of over $200,000 per year or a net worth of over US$1,000,000, as well as qualified purchasers who own at least US$5,000,000 in terms of qualified investments. Further, any one hedge fund is usually limited to not more than 499 investors called limited partners.

As regards the funds, the trade off is that they have fewer investors to sell to, however, they also have correspondingly fewer government imposed restrictions on their investment strategies. The presumption that hedge funds generally pursue more risky strategies may or may not be true depending on the fund in question, and that the ability to invest in these funds should be restricted to the more affluent investors who are presumed to be have the financial reserves to withstand a possible loss.

In recent times, the better hedge funds have evolved to be no longer the last resort amongst investors; instead, funds with well developed investment processes and operational infrastructures, are now usually ISO 9001 certified. Qualifying for the ISO 9001 compliance is increasingly gaining popularity in terms of being a mechanism for identifying credible hedge funds.