Hedge Fund US Regulation

In December 2004, the SEC issued a rule change that required most hedge fund advisers to register with the SEC by February 1, 2006, as investment advisers under the Investment Advisers Act. The requirement, with minor exceptions, applied to firms managing in excess of US$25,000,000 with over 15 investors. The SEC stated that it was adopting a "risk-based approach" to monitoring hedge funds in part because of the massive amount of money collectively invested by hedge funds (over 1 trillion dollars!) The rule change was challenged in court by a hedge fund manager. In June 2006, the U.S. Court of Appeals for the District of Columbia ruled in Goldman v SEC, that the SEC’s regulation was not unfair and arbitrary. It was sent back to the agency to be reviewed.

Hedge Fund Technology

The first directory of hedge fund information was published in 1990 by Antoine Bernheim. Other paper directories followed, and while it was an improvement over the existing methods for gathering hedge fund data, they still proved unwieldy, lacking any kind of apparatus for methodical hedge fund searches. Initial attempts to analyze hedge fund data often involved numerous spreadsheets and complex calculations. Since the rise of the PC, more comprehensive platforms which are capable of utilizing input from multiple commercial databases have been developed. Single-database analysis via the internet is also now available.
The electronic data market has grown exponentially since 1997. There are currently 12 major hedge fund databases available (listed below) some with downloadable analytic packages. Although generally assumed to overlap substantially, there are still unique funds listed on each individual database. It’s normal for approximately 26% of hedge fund investors subscribe to two or more databases. By simply purchasing one or more of these databases investors obtain instant access to thousands of funds, full statistical and qualitative searches, sophisticated portfolio construction and asset allocation, peer and style analysis, simulations and more.

Hedge Fund US Regulation

The typical public investment company in the United States is required to be registered with the U.S. Securities and Exchange Commission. Mutual funds are the most common type of registered investment companies. Aside from registration and reporting requirements, investment companies are subject to strict limitations on short-selling and the use of leverage. There are other limitations and restrictions placed on public investment company managers, including the prohibition on charging incentive or performance fees. This is of course, the polar opposite from hedge funds.

Legal Structure

From a legal perspective, the structure of a hedge fund is very simple. It’s basically a means for holding and investing the funds of its investors. The fund itself is not a genuine business. This means that it has no employees and no assets other than its investment portfolio and a small amount of cash, and its investors are simply considered clients. This is very different from a public mutual fund that has a very defined structure. In a hedge fund, the portfolio is managed by the investment manager, which has employees and property and is the actual business. There is nothing to prevent an investment manager from having numerous hedge funds under his control. This of course, has led to people questioning whether a conflict of interest exists when a hedge fund manager invests his own money into one of the funds they are managing.

How Does a Hedge Fund Work

The hedge fund gets its name because they seek to offset potential losses in the principal markets they invest in by “hedging” their investments using a variety of methods. A hedge is an investment that is taken out specifically to reduce or cancel out the risk in another investment. A typical example of a hedge is short selling. Short selling is the practice of selling securities the seller does not then own, in the hope of repurchasing them later at a lower price. This is done in an attempt to profit from an expected decline in price of a security, such as a stock or a bond. Another similar strategy consists of buying options known as puts. A put option consists of the right to sell an asset at a given price; thus the owner of the option benefits when the market price of the asset falls. Recently, the term "hedge fund" has started to be used when describe any fund that uses “hedging” methods. However, some funds only employ these methods to increase leverage and risk, and therefore return, rather than reduce it.

Hedge Fund History

While a few investors such as Warren Buffett adopted the structure that Jones created, he and his structure was not widely known until 1966. In that year, people noticed that Jone’s fund outperformed the best mutual fund over the previous five years by 44 percent, despite its management-incentive fee. On a 10-year basis, Mr. Jones's fund had beaten the next top performer, the Dreyfus Fund by 87 percent. The same year, the term 'hedge fund' was coined to describe Jones’s approach.
In total, Alfred Jones's investors lost money in only 3 of his 34 years.

Hedge funds fully came into prominence in the late 1980’s. The 1990’s saw hedge funds become major drivers of the stock market. This was also the time for one of hedge funds greatest successes and failures, Long Term Capital Management. LTCM (as it was commonly referred to) was a hedge fund founded in 1994 by John Meriwether (the former vice-chairman and head of bond trading at Salomon Brothers). Initially enormously successful with annualized returns of over 40% in its first years, in 1998 it lost $4.6 billion in less than four months and became a prominent example of the risk potential in the hedge fund industry.

Hedge Fund History

Hedge funds were created by Alfred Winslow Jones in 1949. Jones brought together two economic concepts to create what he considered a conservative investment scheme. He used leverage to buy more shares, and used short selling to avoid market risk. This approach has become a hallmark strategy of many hedge funds known today. He bought as many stocks as he sold, so regardless of whether the market was up or down, Alfred tried to maneuver himself into a good position. To Alfred this meant the crucial question, then, would not be the direction of the market but whether the manager had picked the right stocks to buy and sell. The fund avoided requirements of the Investment Company Act of 1940 by limiting itself to 99 investors in a limited partnership.

Investor information

A qualified client is defined as a company which has at least $ 750,000 under the management of the investment adviser. It can also refer to an individual or a couple who have a net worth of 1.5 million or more. It’s clear that not everyone can invest in a hedge fund but because such large sums of money are at the disposal of a fund manager, they are able to engage in more complex and riskier investments than a public fund might attempt.

Hedge Funds: A Broad Overview

The term “Hedge funds” is a buzzword which seems to be on everyone’s lips these days especially since the US economy is slowing down. This is understandable considering the hedge fund has become a dominant force in the stock market, managing over 700 billion dollars. So what is a hedge fund and how did it become so prevalent in the market? Is it worth to invest in one yourself? Read on and find out.