Hedge Funds- Overview

Since the early days of the hedge fund industry the critical start-up mass of asset under
management has increased. During the 1970s and 1980s it may have been possible to start a
fund with less than US$10 million, while today the level is at least five to six times that
amount. In addition, the client base has shifted from primarily high-net worth individuals and
overseas funds of funds to include institutional investors and pension funds.
Over the past 20 years, the focus and character of funds also has changed along with the
markets, hedging against difficult and volatile markets and maintaining the asset base in
addition to maximising profits. In addition, assets under management and management fees
have increased. Regulatory scrutiny also has increased significantly over the period,
particularly in the wake of the 2010 Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank).
The next phase of the evolution of the industry is for large funds to institutionalise,
passing ownership to successor management.

Hedge Funds- Regulatory Framework

Investment Advisers Act. The Investment Advisers Act of 1940, as amended (Advisers

Act), governs hedge funds. Hedge funds typically are managed by investment advisers.
Unless exempt (for example, a foreign private adviser), large investment advisory firms (that
is, firms with Regulatory Assets under Management (RAUM) of US$100 million or more)
must register with the SEC. Smaller investment advisory firms must register with the
appropriate state(s).
Hedge funds are subject to the same prohibitions against fraud as other market participants.
Managers (registered or unregistered) owe a fiduciary duty to the funds they manage.
Registered investment advisers (RIAs) must file Form ADV with the SEC, which, among
other things, describes their fees, business, the types of securities they invest in, the types of
clients and the assets and funds they manage.
Other securities laws. Other securities laws include:
 Securities Act. Under the Securities Act 1933, as amended (Securities Act), an offer
and sale of securities in the US must be registered with the SEC or be conducted
under an available exemption. Usually hedge fund sponsors offer interests in the fund
 to "accredited investors" with minimum income or asset levels, through a valid
private placement exemption for offerings:
 in the US, under Regulation D or Rule 506(b) or (c); and
 outside the US, under Regulation S (see Question 5).
 Blue Sky Laws. Offerings must be conducted in compliance with applicable state
securities (or "blue sky") laws.
 Investment Company Act. Hedge funds are usually structured under exemptions
available under Sections 3(c)(1) or 3(c)(7) of the Investment Company Act 1940, as
amended (Company Act), because of the onerous compliance requirements under the
Company Act. Generally, the exemptions provide that an issuer fund is not deemed to
be an investment company under the Act unless the fund makes or proposes a public
offering that is limited to either:
 no more than 100 investors (section 3(c)(1), Company Act); or
 "Qualified purchasers", individuals with a liquid net worth of US$5 million or
more, or an institution with a US$25 million net worth (section 3(c)(7),
Company Act).
Exchange Act. The general anti-fraud provisions of the Securities Exchange Act 1934, as
amended (Exchange Act), apply to hedge funds.

Government authorities are moving cautiously as they consider whether new policies or
regulations are needed to control the activities of hedge funds. Certainly, the record of the
past decade suggests instances of large position taking, either directly by hedge funds, or by
other investors with greater capital at their command who may take their cues from hedge
fund activity. Yet this recent history is far from clear that hedge funds, on balance, do more
harm in precipitating the fall of asset prices than they do good by helping break the free fall
that can afflict oversold markets, including markets for currencies. Thus, new restrictions on
hedge funds may do as much harm as good.