While the fact is that hedge funds are considered
“unregulated,” there are some major stipulations to that claim. No investment
is legally allowed to be unregulated, and so the term unregulated may give
people the wrong impression. Regulation is necessary for hedge funds, although
in practice they are quite a bit different from other investments. In terms of
regulations regarding hedge funds within the United States, there are several
things potential investors (and the average person) should know about.
The most direct way that the US has found to regulate hedge
funds is by regulating the practices of financial advisers (the money
managers). While it is true that hedge funds are considered to be private
investments, and that money managers have limited transparency when engaging
with the investments, they must still adhere to any regulations set down. This
regulation is to protect against illegal activity and fraud, and to protect
investors who trust their money to another party. The biggest issue with money
managers is compliance with mandatory record keeping. Money managers/advisers
with over one hundred and fifty million dollars in managed assets are required
to register as such. This is one way of “keeping track” of hedge fund investors
and their managers. Because of the privately owned status of hedge funds, they
are exempt from reporting with SEC (US Securities and Exchange Commission);
although in some situations there are exceptions to that rule of exemption. One
such exception is the fact that hedge funds with equity securities with more
than four hundred and ninety-nine owners/investors have to report to SEC.
Under the Investment Company Act of 1940, hedge funds are
limited to one hundred or fewer investors. Another requirement under the
Investment Company Act of 1940 (which was what allowed hedge funds to be exempt
from SEC in the first place) stipulates that there is certain criteria that
potential investors must meet in order to be able to invest in the first place.
If investors can jump through those regulatory hoops and become a “qualified
purchaser,” the hedge fund investment can move forward and take place. Individuals
who meet “qualified purchaser” status would have to have at least five million
dollars in investment assets. Companies, meanwhile, would need twenty five
million dollars in investment assets. That is the very beginning of the
criteria for investor qualification, and much of it specifically varies by
state.
Other regulations to keep in mind regarding hedge funds in
the United States would be that hedge funds cannot sell their securities publicly. Hedge fund shares are not registered. Hedge fund managers that own
more than five percent of any equity securities are subject to public
disclosure as well. These are just some of the additional regulatory
stipulations and scenarios that investors and managers must comply with. All of
this information is the “tip of the iceberg” when it comes to hedge fund
regulation inside of the United States. As mentioned earlier, specific
regulations may vary by state, and this complicates an already confusing
situation.
No comments:
Post a Comment