CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

39.1 A SUCCINCT HISTORY OF HEDGE FUND REGULATION IN THE UNITED STATES

Investors allocating assets to alternative investment managers need to be aware of the regulatory environment. Regulatory issues are an important part of the due diligence process, as investors need to ensure that fund managers have designed processes to comply with all applicable regulations. Investors also need to ensure that their own operations comply with all required regulations. While this chapter focuses on the regulatory environment of the United States, similar regulations are in place in many countries worldwide.

39.1.1 Private Adviser Exemption

In the United States, hedge funds have historically enjoyed little government interference, oversight, or scrutiny. Hedge funds have typically been exempt from the registration and disclosure requirements of federal securities laws, including the Securities Act of 1933, the Securities Exchange Act of 1934 (Exchange Act), the Investment Advisers Act of 1940 (Advisers Act), and the Investment Company Act of 1940. To qualify for the myriad of exclusions and exemptions, hedge funds have to accept investments only from certain sophisticated or accredited investors and cannot advertise to the general public. (Non-U.S. hedge funds are likewise restricted in terms of who can be solicited to invest in them.) Despite these regulatory perks, hedge fund managers must still comply with general federal securities laws, such as the prohibition against fraud and insider trading. ...