Hedge Fund Investing & Regulation

Hedge funds are pooled investment vehicles that can invest in a wide variety of products, including derivatives, foreign exchange, and publicly traded securities.

Highly publicized reports of both disastrous and wildly successful hedge funds don’t always make it readily apparent how volatile a given hedge fund strategy may be.

• Most hedge funds are not widely available to the public directly;
• Hedge funds are extremely diverse in structure, employing a great variety of investment strategies;
• Hedge funds may concentrate their investments, employ leverage, or engage in other strategies that may offer potential for higher returns but may also pose additional volatility or risk;
• Hedge fund regulation varies widely around the world; in several key jurisdictions (including the United States) such funds are relatively lightly regulated.

The Asset Manager Code provides a set of globally applicable ethical and professional standards for firms managing assets, including hedge funds. 

The global hedge fund industry ended 2016 with approximately $3 trillion in global assets under management, up from approximately $2.9 trillion in the prior year, according to data released by Hedge Fund Research Inc. The industry saw about $70 billion in outflows in 2016. 

Investing in Hedge Funds

Investment in hedge funds is most suited to sophisticated and/or institutional investors who typically have sufficient means, expertise, and capacity to obtain a full appreciation of the risks. These types of investors are best placed to make their own determinations regarding the suitability of hedge funds. It is likely that many hedge funds are not suitable investments for small or retail investors, who typically lack the means to fully understand the nature and risks of investment in hedge funds. Hedge funds that are marketed to retail investors should provide a high degree of product transparency to protect investors’ interests.

Funds of Hedge Funds

Funds of hedge funds provide a cost-effective means by which investors can gain exposure to the underlying performance of hedge funds. Robust due diligence on the part of the investment manager in selecting which funds to invest is a key component in protecting investors’ interests in these products. Funds of hedge fund managers should also put in place policies and procedures to manage the liquidity risk of the fund so that fund investors do not suffer undue difficulty when redeeming their units.

Hedge Fund Transparency 

Hedge fund investors and regulators require disclosures that detail key information on the funds managed. Transparency enables investors to properly evaluate their holdings in the fund, and enables supervisors to monitor for the build-up of risks.

Hedge Fund Verification

Periodic review of hedge fund disclosures by independent service providers verifies that the fund in question is adhering to accepted standards of presentation and performance calculation. This provides fund investors with assurance that the information on which they base their decisions is accurate and reliable.

Hedge Valuation

Hedge fund assets and liabilities should be valued according to generally accepted valuation policies and procedures. Hedge fund managers should provide full transparency to investors over the use of any valuation models.