Hedge Funds

In the March/April 2006 issue, I addressed the new regulations and amendments to the Investment Advisers Act of 1940 ("Act" or "Hedge Fund Rule").¹ As of Feb. 1, 2006, the new regulation (Rule 203(b)(3)-2) required significantly more hedge fund advisers to: (1) register with the SEC; (2) implement new policies and procedures; (3) designate a chief compliance officer; and (4) comply with the Act and all applicable SEC rules.²   

As set forth in my previous column, hedge funds employ a range of speculative and aggressive strategies that frequently combine common investments with short sales, leveraging, and arbitrage strategies to maximize returns, and therefore require savvy investing by experienced backers. For the past 60 years, hedge funds have been able to sidestep requirements of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940. That was, until February 2006, when the requirements that certain hedge fund advisers register with the SEC commenced (though the actual rule was adopted in December 2004). The SEC fought hard for a few years to pass these new regulations and amendments, which were finally approved by the Commission with a mere majority vote of 3/2.