They are usually structured as partnerships with the general partner being the portfolio manager, making the investment decisions and the limited partners as the investors. These funds are subject to the same market rules and regulations as any trader.They use advanced investment strategies such as leverage, long, short and derivative positions in both international and domestic markets with the aim to generate high returns.
Hedge funds are expected to offer profit potential in both rising and falling markets.They are usually less highly regulated than traditional funds.
Prior to investing in this type of fund, it is vital to have a basic understanding of the characteristics of the different Hedge fund strategies. Most hedge funds provide you all possible strategies for a safe investment.
1. Long/short or Hedged Equity Strategies: This is considered to be the largest category of hedge funds in terms of numbers.
2. Relative value strategy: These funds are often considered as market neutral since there is little or no market related element to their returns.
3. Event Driven Strategy: It seeks to anticipate and profit from price movements that arise from specific corporate events, such as take over and mergers.
4. Tactical Trading Strategy: These are the highest risk of all hedge funds as a sector.
These strategies are not as easily accessible. Most often, hedge funds are set up as private investment partnerships legally that are open to a limited number of investors and need a very large initial minimum investment. Investments made in hedge funds are illiquid since they require investors to keep their money in the fund for a minimum period of at least one year. Unlike mutual funds, hedge funds are unregulated since they cater to sophisticated investors.
Investors should note that hedging is basically the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return of investment. Use of different strategies avoids hedging risks.
Hence it is evident that with better returns and risk, hedge funds are superior to mutual funds and there are increasing amount of evidence that shows the benefits of considering hedge funds as an asset class at the strategic asset allocation level.
Hence investors should understand that the hedge fund promise of pursuing absolute returns means hedge funds are liberated with respect to registration, investment positions, fee structure and liquidity. Liquidity is the main concern for investors. So go ahead and invest for good returns.
Recently, the SEC proposed changes that would affect the investment in hedge funds as well as other pooled investments. On December 27,2006, Release No. 33-8766 (the "Release") proposed an anti-fraud rule that would be new under the Investment Advisers Act of 1940 (the "Advisers Act"). This new rule revised criteria for admission for individuals that invest in some private funds (excluding some venture capital funds). The Release says that these rules are meant to cover two of the SEC's particular areas of interest.
Accredited Investor
The Release suggested new standards for individuals that may invest in certain funds privately offered as an enhanced definition of "accredited investor." These funds are exempt from the Investment Company Act of 1940, as amended (the "1940 Act") by provisions of Section 3(c)(1). New standards would require "accredited investors" to fulfill the previous standards plus not own investments totalling less than US$2.5 million as a qualified purchaser under the Section 3(c)(1) exemptions. Under Regulation D of the Securities Act of 1933, as amended, require a net worth of over $1 million (individual or joint net worth with spouse), or have an income over $200K each year over the past two years (or joint income with a spouse of over $300K in each of those two years plus an expectation to stay at the income level for the current year).
Anti-fraud Regulations
Section 206(4) of the Advisers Act has a new proposed anti-fraud rule that would prohibit investment advisers from making statements to investors in pooled investments it manages that would be misleading or false, regardless of whether the investment is registered or unregistered (including hedge funds). The management company also many not participate in fraudulent, manipulative, or other deceptive behavior.
The rule would allow the investors to be viewed through the fund, and reverses one of the effects of the U.S. Court of Appeals decision in Phillip Goldstein, et al, v. SEC. In this case, the SEC's 2004 requirement for hedge fund advisers to count investors in that particular fund to determine if registration is neceaary was overturned. The new rule is meant to assure that the anit-fraud provisions apply to future and prospective investors and not just to the current pool.
The Release also stated that the new rule was made intentionally broad to outline "the making of materially false or misleading statements as a fraudulent, deceptive or manipulative practice, and to prohibit other practices that defraud or deceive pool investors, rather than designed to prohibit a specific practice." It would regulate practices and statements made to current and prospective investment clients, and would provide for, among other things, representations made in account statements and memoranda.
Investment advisers to pooled investment vehicles as well as advisers that are not required to be registered under the Advisers Act, are covered in this new rule as well. The SEC stated in the Release that "it is critical that we continue to be in a position to bring actions against unregistered advisers that manage pools and that defraud investors in those pools."
Robert Masud has sinced written about articles on various topics from Hedge Funds of Funds, Hedge Funds of Funds and The Internet. Robert Masud, Esq. is the principal of Masud & Company LLC, a . Find out how our lawyers can help you at. Robert Masud's top article generates over 18100 views. to your Favourites.