Not just anybody can enter the world of hedge fund investing. First, you must have enough money as hedge fund investing does not come cheap. Next, you must meet the Securities and Exchange Commission’s prerequisite of being an accredited investor. On top of that, some hedge funds impose additional qualifications beyond SEC requirements.
Being an accredited investor has less to do with your experience or education in finance than it has to do with your net worth and income. To be an accredited investor, you must have a net worth of at least $1 million. If you are married, you and your spouse’s combined net worth must be at least $1 million. You must also have an income of at least $200,000 in the most recent two consecutive years. If you are married, you and your spouse must earn a combined income of $300,000 in the most recent two consecutive years.
Business and trusts can also invest in hedge funds provided they meet the SEC's requirements of accredited investors. For businesses, if all the equity owners of the company individually meet the accredited investor requirements, the business may invest in hedge funds. For a trust to invest in hedge funds, the assets held in the trust must exceed $5 million in value. Additionally, the trust cannot have been formed specifically to invest in hedge funds.
An Employee Retirement Income Security Act-compliant employee benefit plan that holds at least $5 million in assets can invest in hedge funds. But only if an SEC-registered investment adviser determines investment decisions on behalf of the employee benefit plan. Charities, corporations and partnerships with a minimum of $5 million in assets may also invest in hedge funds.
The additional requirement that some hedge funds impose is the qualified purchaser requirement. You are a qualified purchaser if you have more than $5 million is investments either by yourself or jointly with your spouse, ex-spouse, siblings or descendents, such as children or grand children. Under the qualified purchaser requirements, trusts, corporations, charities and partnerships must have at least $25 million in investments before they can invest in hedge funds.
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