Hedge funds employ strategic trading models – often incorporating a variety of investment techniques and strategies – to achieve higher returns and increased profitability for their investors.
However, they also face unique risks and regulatory requirements, leading to common questions like: What can hedge funds invest in? Do they need to register (and when)? What about appointing a Chief Compliance Officer (CCO)?
To lend clarity and refresh your knowledge, we’re exploring nine common questions (and answers) surrounding hedge fund regulations (plus links and resources you can use to learn more).
Related: Beyond the checklist: The strategic value of compliance program management for hedge funds
Nine FAQs on Hedge Fund Reporting Requirements and Compliance
1. What is the difference between a hedge fund and a private equity fund?
A private fund usually includes a group of investors and is generally not offered on any public exchanges (hence the “private”). An investment manager usually oversees the fund and helps to make any investment decisions, and charges an ongoing management fee. Per the SEC, private funds are “not required to be registered or regulated as an investment company under the Investment Company Act.”
Hedge funds fall under the umbrella of private funds, but are usually only open to accredited investors with a high net worth. They are focused on making high returns in a short period of time and can borrow money and invest in a variety of asset types to do so.
2. Do hedge funds need to be registered?
Hedge funds will need to be registered with the SEC if they have over $150 million in managed assets via accredited private fund investors. If there are investors in the fund that don’t qualify as accredited private investors, that threshold drops to $100 million.
If you’ve exceeded the $150 million threshold (or failed to qualify for any other exemptions), you’ll have up to 90 days to file registration with the SEC.
There used to be an exemption for hedge funds that managed fewer than 15 clients total, but it is no longer applicable.
3. Are hedge funds regulated by the SEC?
Yes, unless a hedge fund meets certain exemption criteria (such as the assets under management threshold mentioned above), they will have to register with the SEC.
Among other requirements, hedge fund advisers must file a Form ADV to the SEC. A Form ADV includes information like names of the owners and advisers at your firm, potential conflicts of interest, business background of advisers and more.
Additionally, the Form ADV for hedge fund advisers was expanded in 2011 to cover:
- Further information regarding the private funds they advise on
- More data on the advisory business itself like the type of clients, advisory activities, employees, etc.
- Business practices which may create a significant conflict of interest
- Financial industry affiliations or non-advisory activities
4. Can hedge funds invest in real estate?
Yes. Hedge funds invest in a variety of assets, generally including high-risk or non-traditional investments.
A 2022 Investopedia article reported that about 40 hedge funds invested substantially in real estate. These funds usually invest through REITs, or real estate investment trusts, which are publicly traded companies – although some real estate hedge funds invest by purchasing property outright.
5. Can hedge funds invest in private companies?
Yes, hedge funds can invest in private companies through private equity investments, venture capital investments or direct investments in privately held companies.
And although private companies are often higher risk in that they have less regulatory oversight than their publicly-traded counterparts, hedge funds have increasingly turned toward private companies as their investment of choice.
6. What are the regulatory requirements specific to hedge funds?
In addition to any regulatory or compliance requirements concerning all registered advisers, hedge fund advisers may have additional regulatory responsibilities, including:
- A limit on the number and type of investors involved
- Specific disclosure requirements (which were amended in 2023)
- Expanded Form ADV reporting requirements
- And more
For example, the CFA Institute’s Research and Policy Center writes:
“Hedge funds are restricted under Regulation D under the Securities Act of 1933 to raising capital only in non-public offerings and only from “accredited investors,” or individuals with a minimum net worth of $1,000,000 or a minimum income of $200,000 in each of the last two years and a reasonable expectation of reaching the same income level in the current year.”
Since specific compliance requirements will vary depending on the fund’s size, investors involved, types of investments, location and other factors, it’s best to check directly with the regulatory body with which your hedge fund is registered to gain a comprehensive understanding of compliance needs.
7. Are there any new hedge fund regulations I need to know about?
The SEC did finalize new rules for private equity advisers in 2023, which extend to hedge funds as they are generally considered a subset of private funds.
The majority of these new rules center on disclosure requirements, such as disclosing clawback amounts and gaining investor consent before borrowing or receiving credit.
All registered private fund advisers will also need to provide quarterly performance reports to investors (to be sent within 45 days of the end of the quarter and 90 days from the end of the fiscal year). They will also need to conduct annual “surprise” audits via a certified public accountant.
Furthermore, the new rules touch on the prohibition of preferential treatment between investors of the same fund.
Note that the above is by no means exhaustive, but serves as a brief overview of recent regulatory changes. You can read the full final ruling on private fund advisers and documentation here.
8. Are hedge fund managers required to file a Form PF?
Yes, all non-exempt SEC-registered advisers must file a Form PF, which provides information about the activities and operations of private funds (including hedge funds).
The SEC has also adopted new amendments concerning the Form PF, which apply to large hedge fund managers (managing north of $1.5 billion in AUM).
Per the SEC fact sheet, the amendments “require current reporting by large hedge fund advisers regarding certain events that may indicate significant stress at a fund that could harm investors or signal risk in the broader financial system.”
9. Can hedge funds outsource compliance needs?
Yes, hedge funds can outsource many compliance tasks to a third-party compliance firm or consultant. These compliance experts can lend specialized knowledge, risk management and scalability to hedge funds.
Related: Your hedge fund’s guide to managing material non-public information (MNPI) risk
However, note that SEC-registered hedge funds are still required to appoint a Chief Compliance Officer (CCO) to oversee their compliance program.
As you refresh your knowledge on hedge fund regulation, these nine common questions offer a great starting point to build your team’s compliance program.
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