How Hedge Funds Are Regulated

If you are thinking of investing in or working in a Hedge fund market, you should know about the major rules and regulations that have come into effect in the US.

Firstly, what are Hedge funds? The Hedge funds in the US market are privately-owned companies. They take investor’s money and reinvest them to get very high returns, even if the market is incapable of performing to this level.

Hedge funds are usually investments that are the result of limited partnerships. They can even be orchestrated by limited liability corporations that work to help out and pay investors and Hedge fund managers if the fund bankrupts itself.

Previously, there were no limits to how much a Hedge fund manager could invest or earn from Hedge funds and, therefore, managers went above and beyond to outperform financial markets. However, the US government now requires Hedge fund investors and managers to register with the SEC and carry out investments and transactions legally and responsibly.

First of all, why are Hedge funds regulated in the US? The 2008 financial crisis was in part driven by the non-regulation of the Hedge fund market, derivatives and the use of mortgage-backed securities. As a result of a 2006 crisis in the housing market, the Hedge fund market began to collapse and had to be bailed out.

This is why the US government came up with the Dodd-Frank Wall Street Reform Act in 2010. This makes it mandatory for Hedge funds that have a value of more than 150 million dollars to register with the regulating body, SEC.

The Financial Stability Oversight Council also looks over the activities of Hedge funds to make sure that financial firms and Hedge funds do not grow too big. If they become very large, the Federal Reserve will have to regulate and oversee these firms.

This regulation is in place to manage firm sizes so that they do not need as large of federal bailouts as were needed in 2008 when Hedge funds failed. For this reason, the 2010 Dodd-Frank Wall Street Act has also put a limit on how much can be invested in Hedge funds by banks.

Financial institutions like banks cannot use Hedge funds for their own profit but they can use it for their customer investment portfolios. The 2010 Act regulates derivatives and has Hedge fund managers register themselves and submit reports about investment strategies, debt-to-equity ratios, risk metrics and products.