Hedge Fund Creation, Regulation and Compliance

By Mark J. Astarita, Esq.

In its most expansive definition, a hedge fund is a private investment fund, usually structured as limited partnership, managed by the general partner who makes the investment decisions and collects a management and incentive fee. The investors in the fund are the limited partners, who share in the profits of the investment activities, but who have no say in the investment decisions. For those of you who are new to investing, a hedge fund is similar to a mutual fund in that an investment professional manages a pool of money from various investors. For an overview of hedge fund regulation, see, Hedging Your Bets

However, no matter how one defines a hedge fund, the common factor is that a hedge fund is not registered in any way with any securities agency – at least not on the federal level. A hedge fund is not a broker or a dealer since it does not buy or sell securities for others and receive a commission. Technically, it is an Investment Company, but pursuant to exemptions contained in the Investment Company Act, it is exempt from the registration requirements under that Act.

Those regulations are changing, and the SEC recently made changes to some of the rules, which now require certain hedge fund managers to register as investment advisers.

The creation and establishment of a hedge fund involves two separate concepts – the creation of a limited partnership (in order to provide the investment vehicle for the investments by the investors) and the creation of a Regulation D offering – while a the hedge fund itself is not subject to registration, its solicitation of investments is subject to the securities laws. Once again however, a properly created hedge fund is exempt from the registration requirements of the Securities Act of 1933, so long as the offering is accomplished pursuant to an exemption, typically pursuant to Regulation D.

Creation, registration and management of a hedge fund involves a number of securities laws, on a state and federal level, and should not be attempted without the assistance of an experienced securities attorney.

Copyright 2005, Mark J. Astarita. All Rights Reserved. Mark J. Astarita, Esq. is a partner in the law firm of Beam & Astarita, LLC, and represents financial professionals and firms nationwide, in a wide variety of matters. He can be reached at (212) 509-6544 or by e-mail at astarita@seclaw.com.

Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.

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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.