A hedge fund manages investments on behalf of its investors; depending upon the size of the fund and composition of its members, a new hedge fund might not have to register with the Securities and Exchange Commission (SEC). Funds with managed assets in excess of $150 million must register with the SEC; per 2010's Dodd-Frank regulations, however, funds with managed assets under $100 million report to the government of the state in which they are managed. Though not all hedge funds are subject to direct SEC regulation, some parameters apply to all.
Hedge funds are either managed onshore -- in the United States -- or offshore. If you start a hedge fund and manage it from an offshore location, such as the Cayman Islands, you are subject to SEC regulation if you have more than 15 clients in the United States and manage $25 million or more for them. As of 2010, an onshore hedge fund registers with either the SEC or its state government depending upon the value of its assets. State or SEC regulation requires funds to pay a registration fee; the fee varies by state, but funds registered with the SEC paid a $250,000 fee in 2004.
A newly-established fund that is registered with the SEC must report information about its trading activities and portfolios to regulators. The aim of such reporting is to monitor and curb systemic risk -- volatility that pervades the entire market -- in the open markets, according to senate.gov. Sections 404 and 406 of Dodd-Frank legislation, which the SEC has adopted, divides registered funds based on size; smaller groups -- which are likely to also be newly-established -- are required to report leverage, credit providers, investor concentration and fund performance to the SEC annually.
The SEC classifies a hedge fund based upon its size and composition of its members. If you start a hedge fund that abides by Section 3(c)(1) of the Investment Company Act of 1940, for example, the fund is limited to 100 investors, each of which must be accredited, according to Sadis and Goldberg. An accredited investor is a citizen or permanent resident whose net worth is above $1 million, not including the value of his home; an investor can be accredited based on her income level as well. Hedge funds generally must ascribe to Regulation D of the Securities Act of 1933 when identifying investors and distributing securities, though Dodd-Frank's Volcker Rule limits the degree to which corporations and banks can invest in a hedge fund.
The number of investors a hedge fund has determines the SEC regulations to which the fund is held. The Securities Act of 1933 requires a hedge fund to extensively disclose its positions to the SEC if it seeks public funds; the Securities Exchange Act of 1934 requires extensive disclosures to the SEC if a fund has more than 500 clients, according to David Skeel of the website Legal Affairs. A person may serve as many investors as he would like as a hedge fund manager, though many hedge funds elect to serve a small base of investors to avoid SEC filings.
- SEC: Dodd-Frank Wall Street Reform and Consumer Protection Act
- "New York Times"; For Small Hedge Funds, Success Brings New Headaches; Azam Ahmad
- Senate: Brief Summary of the Dodd-Frank Wall Street Reform and Consumer Protection Act
- SEC; SEC Proposes Private Fund Systemic Risk Reporting Rule; 2011
- Sadis and Goldberg: Forming a Hedge Fund
- Legal Affairs; Behind the Hedge, David Skeel