Tag Archives: hedge fund managers

Hedge Fund Databases | Survey of Databases

Hedge fund databases are online databases that collect and publish information and performance results from hedge fund managers who list their fund.  Usually these databases are open to accredited investors who subscribe to the website.

Aside from providing basic information on the hedge fund, including the name of the fund, the manager, and contact information, the database will usually include performance results, fees, and other additional strategy and structure information.  The extensiveness of the listing, as well as the amount of funds available for viewing, depends on the database.

For hedge fund managers, databases serve as a way to obtain investors and publish their fund’s information to a wider audience.  Most websites require that the manager update their performance reports on a monthly or quarterly basis, and the cost to both list and update information is free.  Often there are also additional requirements for a manager to list a fund, such as a minimum track record or minimum length of active performance, but this also depends on the individual database.

We have compiled a list of popular online databases, which are listed below.  Information on these databases will be updated appropriately as the websites’ policies and fees change throughout the year.


Database: Hedgefund.net

Leading Source for Hedge Fund Performance, News and Information

UPDATE: Information from below has been deleted because it was not up to date according to a representative at hedgefund.net.

For Managers:

  • Requirements (to list fund):
  • Minimum Track Record:

For Investors:

  • Number of Funds:
  • Updated:
  • Fee Structure:
  • Who Can Subscribe:

Database: Hedgeco.net

The Leading Free Online Hedge Fund Database and Source of News on Hedge Funds

For Managers:

  • Requirements: Offering Documents, PPM Documents
  • Minimum Track Record: No

For Investors:

  • Number of Funds: Around 7,000
  • Updated: Daily
  • Fee Structure: Offers free Basic Membership and Diamond Membership for $10,000 per year
  • Who Can Subscribe: Pension plans, family offices, consultants, funds of funds, banks, insurance companies, foundations, endowments, and qualified private investors

Database: Hedgefundresearch.com

For Analysts and Investors Who Demand Access to the Broadest Universe of Hedge Funds

For Managers:

  • Requirements: One month of active performance
  • Minimum Track Record: None

For Investors:

  • Number of Funds: Over 6,500 funds and fund of funds
  • Updated: Bi-weekly
  • Fee Structure: Offers HFR Manager Access Package, which includes access to HFR’s five main strategy databses for $2,500, or one year subscription to HFR Database for $7,000
  • Who Can Subscribe: Accredited investors

Database: Barclayhedge.com

Research on Hedge Funds, Fund of Funds, and Managed Futures/Alternative Investments

For Managers:

  • Requirements: One active month of performance
  • Minimum Track Record: None

For Investors:

  • Number of Funds: 5,723 (Global); 4,675 (Hedge Fund); 2,846 (Single Manager)
  • Updated: Bi-monthly
  • Fee Structure: $6,000 for annual subscription (Global); $4,500 (Hedge Fund); $3,500 (Single Manager); and accredited investors or those who work for an accredited institution can use the Barclay DataFinder for Free
  • Who Can Subscribe: Accredited investors

Database: Corporate.morningstar.com

A Leading Provider of Independent Investment Research in North America, Europe, Australia, and Asia

For Managers:

  • Requirements: Questionnaire, PPM/Offering Documents/DDQ or other fund documents
  • Minimum Track Record: None

For Investors:

  • Number of Funds: Offers access to 8,000 U.S. and international funds
  • Updated: Monthly
  • Fee Structure: $179 annual membership, $19.95 monthly membership
  • Who Can Subscribe: Fund of funds, family offices, consultants, mutual fund companies, other investment managers

Database: Lipperweb.com

The Leading Independent Industry Source of Hedge Fund Performance Data

For Managers:

  • Requirements: Lipper TASS Questionnaire, latest version of Prospectus/Offering Document/PPM, most recent Audited Financial Statements
  • Minimum Track Record: None

For Investors:

  • Number of Funds: 6,300
  • Updated: Daily
  • Fee Structure: $8,040 annual subscription
  • Who Can Subscribe: Accredited investors

Database: Casamhedge.com

The Oldest CTA and Hedge Fund Database in the Market and the Source of Data for the CASAM and CISDM Indices

For Managers:

  • Requirements: None
  • Minimum Track Record: None

For Investors:

  • Number of Funds: Offers access to 4,500 hedge funds, fund of funds, and CTAs
  • Updated: Monthly
  • Fee Structure: Free
  • Who Can Subscribe: Accredited institutional investors, registered investment advisors

Database: Eurekahedge.com

Provides the Greatest Breadth and Depth of Information on the Global Alternative Fund Industry

UPDATE: Information from below has been deleted because Eurekahedge has problems with how our information was presented.

For Managers:

  • Requirements:
  • Minimum Track Record:

For Investors:

  • Number of Funds:
  • Updated:
  • Fee Structure:
  • Who Can Subscribe:

Database: Hedgefundintelligence.com

The Most Extensive Database of Single-Manager Hedge Funds and Fund of Funds Available

For Managers:

  • Requirements: Proof of active performance, signed terms of agreement
  • Minimum Track Record: None

For Investors:

  • Number of Funds: Over 11,000
  • Updated: Daily
  • Fee Structure: $3,050 annual subscription for Americas Database
  • Who Can Subscribe: Qualified accredited investors

Database: Cogenthedge.com

Intelligent Tools for Informed Decisions

For Managers:

  • Requirement: None
  • Minimum Track Record: None

For Investors:

  • Number of Funds: 6,100 active investments
  • Updated: Daily, Real-time basis
  • Fee Structure: Free for online research use, $5,000 annual to take off-line and use elsewhere
  • Who Can Subscribe: Accredited and qualified investors

Database: Informa Investment Solutions

The Investment World’s Compass

For Managers:

  • Requirements: CC Registered
  • Minimum Track Record: None

For Investors:

  • Number of Funds: Over 12,000 investment products
  • Updated: Monthly
  • Fee Structure: Free
  • Who Can Subscribe: Plan sponsors, investment consultants and brokerages


Other related hedge fund law articles include:

  • Hedge Fund Managers
  • Hedge Fund Investors
  • Hedge Fund Marketing

Bart Mallon, Esq. runs the Hedge Fund Law Blog and provides hedge fund information and manager registration services through Cole Frieman & Mallon LLP. He can be reached directly at 415-868-5345.

Insider Trading Overview

In light of the recent focus on insider trading, we are publishing the SEC’s discussion on Insider Trading which can also be found here.  The information below contains a broad overview of some of the important aspects which hedge fund managers should understand about the insider trading prohibitions.

For a greater background discussion on the legal precedents which helped shaped the state of law today, please see Insider Trading—A U.S. Perspective, a speech by staff of the SEC.


Insider Trading

“Insider trading” is a term that most investors have heard and usually associate with illegal conduct. But the term actually includes both legal and illegal conduct. The legal version is when corporate insiders—officers, directors, and employees—buy and sell stock in their own companies. When corporate insiders trade in their own securities, they must report their trades to the SEC. For more information about this type of insider trading and the reports insiders must file, please read “Forms 3, 4, 5” in our Fast Answers databank.

Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information.

Examples of insider trading cases that have been brought by the SEC are cases against:

  • Corporate officers, directors, and employees who traded the corporation’s securities after learning of significant, confidential corporate developments;
  • Friends, business associates, family members, and other “tippees” of such officers, directors, and employees, who traded the securities after receiving such information;
  • Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded;
  • Government employees who learned of such information because of their employment by the government; and
  • Other persons who misappropriated, and took advantage of, confidential information from their employers.

Because insider trading undermines investor confidence in the fairness and integrity of the securities markets, the SEC has treated the detection and prosecution of insider trading violations as one of its enforcement priorities.

The SEC adopted new Rules 10b5-1 and 10b5-2 to resolve two insider trading issues where the courts have disagreed. Rule 10b5-1 provides that a person trades on the basis of material nonpublic information if a trader is “aware” of the material nonpublic information when making the purchase or sale. The rule also sets forth several affirmative defenses or exceptions to liability. The rule permits persons to trade in certain specified circumstances where it is clear that the information they are aware of is not a factor in the decision to trade, such as pursuant to a pre-existing plan, contract, or instruction that was made in good faith.

Rule 10b5-2 clarifies how the misappropriation theory applies to certain non-business relationships. This rule provides that a person receiving confidential information under circumstances specified in the rule would owe a duty of trust or confidence and thus could be liable under the misappropriation theory.

For more information about insider trading, please read Insider Trading—A U.S. Perspective, a speech by staff of the SEC.


Other related hedge fund law articles include:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs the Hedge Fund Law Blog and the Series 79 exam website.  He can be reached directly at 415-868-5345.

Hedge Funds and Investors: June 2009

Overview of the Hedge Fund Industry in June

It is nice to have a chance to step back from the regulatory side to see the big picture of the hedge fund industry.  The article below discusses what is currently happening in the various hedge fund strategies and what investors are looking for from managers.  The article is written by Bryan Goh (First Avenue Partners) and addresses the issues related to the hedge fund industry in June of 2009.  Reprinted from Byan’s blog called Ten Seconds Into the Future.

Hedge Funds: The State of the Craft: June 2009

By Bryan Goh

The fundamental picture:

The second quarter of 2009 witnessed a continuation of the rally in all risky assets from equities to credit to commodities and energy to illiquid Asian physical real estate. On the back of this reversal of the acute risk aversion that plagued the fourth quarter of 2008 and the first quarter of 2009, economists began to detect ‘green shoots’ of economic recovery. However, economic growth forecasts in the developed world continue to be depressed. The US for example is expected to show -2.8% growth in 2009 with a weak recovery in 2010 of 1.6%; the Euro zone is expected to shrink by 2.3% in 2009 and grow by an insipid 1.7% in 2010 with dire numbers from Germany (-5.5% 2009, +0.55% 2010), and Italy (-4.4% 2009, +0.4 2010). Emerging markets were widely expected to decouple, but thus far the incipient recovery is only evident in BRIC, with China growing +6.5% in 2009 and +7.3% in 2010, India growing +5.5% in 2009 and +6.4% in 2010, Brazil shrinking 1.5% in 2009 before growing 2.7% in 2010 and Russia shrinking 5% in 2009 and growing 2% in 2010. Outside of the BRIC, emerging markets’ highly export driven economies are severely impacted by the slowdown in the developed world,  the dearth of demand and the unavailability of trade finance.

Developed markets have been hobbled with historically high debt levels, distressed real estate prices, rising unemployment, weakening retail sales, shrinking industrial production and declining consumer and business confidence. Coupled with impaired sovereign balance sheets, the result of financial rescue packages, Keynesian fiscal reflationary policies, an ageing population’s impact on state pensions and healthcare, the outlook for developed market growth is not optimistic. The one area of potential respite is the external sector, which as a matter of mathematics has to and will adjust to reduce the scale of current account imbalances.

Emerging markets have somewhat healthier financial systems, sovereign balance sheets and private savings levels and are thus in a better position to implement fiscal reflationary policies and centrally influenced if not planned extension and allocation of credit. This, however, remains concentrated in the larger emerging markets such as BRIC where domestic diversification reduces the dependence on the external sector.

The expansion of the government in the economy is therefore more feasible in the BRIC. It has been moderately successful. China is a case in point where fixed capital formation in the form of infrastructure build has more than made up for the gap from a collapse of external trade and a moribund consumer sector.

These efforts provide a stay of execution. Time, however, is a healer, under the assumption of free markets. Protectionism and outright central planning has historically proven counter productive. It is interesting to note that while developed markets flirt with market interventionist policies, bend Chapter 11, and increasingly embrace quantitative easing, further emergency interest rate policy, flirting with protectionism, interfering with the banking system; emerging markets have by and large embraced free markets.

While policy makers continue to hold interest rates at low levels, the inflation deflation debate continues. Central banks with formal inflation targets may be more likely to tighten prematurely than central banks with a softer target or a more holistic mandate. Given the rate at which capacity utilization has fallen and the current levels at which it rests, it is unlikely that inflation will take hold. On the other hand, given the reflationary capacity of BRIC and competition for natural resources, deflation is unlikely to take hold either. Central banks are likely to be afforded the latitude to hold short rates lower for longer in their anti-recessionary campaigns. Long bond yields are likely to display news driven and data driven volatility as signs of inflation wax and wane.

Hedge Fund Performance:

Performance to May 2009:


Hedge Fund Outlook:

Generally, the outlook for hedge fund strategies is very positive. There are a number of reasons for this. The period 2005 to 2007 saw a surge in equity capital employed in hedge fund strategies. With increasing volumes of arbitrage capital, return on gross capital employed compressed, as one would naturally expect. Hedge funds adaptively increased their leverage in order to maintain return on equity, a strategy feasible because interest rates were low and credit spreads were tight and thus leverage was cheap. The bankruptcy of Bear Stearns and then Lehman Brothers in 2008, triggered a massive deleveraging of the entire arbitrage industry from hedge funds to bank proprietary trading desks. Mark to market losses triggered large scale redemptions from hedge funds which left what in 2007 was a 2 trillion USD industry with an estimated paltry 1.2 trillion USD of assets under management. This together with the wholesale withdrawal of leverage from an average of 3.5 to 4 X to 1.5 to 2X, implies a 70% to 75% shrinkage in capital employed in arbitrage. The indiscriminate withdrawal of risk has created ubiquitous arbitrage and relative value opportunities.

Equities: Market sentiment went from monotonic risk aversion from the second half of 2009 into the first quarter of 2009. During this time, equity dispersion was explained not by earnings prospects but by news flow and macro implications on balance sheet integrity. And a great deal of simple panic. The very sharp rebound from mid March 2009 has similarly been driven not by earnings fundamentals but by a reversal of risk aversion and other dynamic factors. As market volatility settles, equity dispersion is expected to be increasingly driven by fundamentals once again. The opportunity set for equity long short managers is improved.

Event driven: In every distressed cycle, private equity buyouts dwindle and deal break risk is escalated due to buyers remorse. When coupled with a credit crisis, jurisdictions where committed financing is not a prerequisite to an approach and banks themselves in jeopardy also increase deal risk. Following this initial round of panic and disorder, the following period of calm usually witnesses deal flow on the basis of strategic alliance, self preservation, consolidation, asset disposals, and capital raising. This is the landscape facing the event driven merger arbitrageur today. The dearth of arbitrage capital has also resulted in slower convergence, more volatility of spread and a profitable environment for the strategy.

Macro and Fixed Income: Macro strategies did relatively well in 2008 as large and trivial trades presented themselves with the ebb and flow of capital driven by acute risk aversion and government reactionary policy. These trades have now receded into history. Going forward macro is likely to continue to perform well on the back of persistent volatility in fixed income markets driven by the cycles of central bank policy and investor prevarication between inflation and deflation. These same themes create interesting arbitrage opportunities in fixed income arbitrage as well as short rates react to policy and long rates to inflation expectations and sovereign credit risk. The reduction of capital in fixed income arbitrage also presents interesting arbitrage opportunities between cash, synthetic, futures, forwards, swap and repo markets.

Asset based investing / lending / Trade Finance: The global credit crisis and associated global economic recession has resulted in a dearth of credit. Providers of credit are therefore well rewarded. In trade finance, for example, a sharp fall in world trade of over a third in the final quarter of 2008 was only surpassed by the contraction of available trade finance. Banking consolidations also constrain credit further as obligor limits are exceeded in merged financial institutions. The result is wider spreads and tighter collateral terms. Hedge funds involved in lending are able to use non-traditional deal structures to secure their collateral while exacting competitive spreads.

Credit: A situation in credit markets exists akin to the one in equities. Systemic risk was high in 2008 and credit was systematically sold despite differentiated idiosyncratic issuer risk. The credit space is richer than equities, however, due to the richness of the capital structure, particularly in more mature developed markets like the US, representing excellent raw material for which to express capital structure dislocation trades. Differing natural investors or traders at different parts of the capital structure create arbitrage opportunities which barring unilateral regulatory or government intervention, represent true arbitrage.

Convertible arbitrage: Convertible arbitrage was one of the worst performing strategies in 2008 and one of the best performing strategies in 2009 to June. The losses came from a confluence of general risk aversion, deleveraging by banks and institutions, hedge fund redemptions and failures from over-levered portfolios, and a collapse in the funding mechanism of which the prime brokers were integral. With a normalization of market conditions convertible bond markets have recovered sharply. The crucial question is, to what extent is the current recovery in convert arbitrage funds purely a directional one, profiting from the rising tide lifting all boats. Convertible arbitrage, however, is a catch all for a suite of sub strategies of varying sophistication, direction and use. The current market is replete with less-directional opportunities. These arise from the diversity of pricing and valuation across the convertible space, as well as a revival in primary issuance. The credit elements of convertible arbitrage were highlighted in 2008 and will continue to be a key consideration in assessing convertible bonds. Directional expressions of fundamental views on companies can be very efficiently captured using convertibles as well. A fundamental view on a company need not be restricted to first order (levels) pricing but can extend to views about the pricing of the volatility of the company. Capital structure trades can also be expressed with convertibles for example in theoretical replications with bounded jump to default values for a range of recoveries.

Distressed Credit: When the credit crisis first broke in mid 2007 in the US sub prime real estate mortgage market, investors had already begun to seek opportunities in distressed debt. The distress has been concentrated mostly to the real estate backed securities market and latterly to consumer loan backed securities. Among corporate rated issuers default rates remained low. High yield default rates while accelerating sharply in 2008 had only reached 5.42% by 1Q 2009 according to S&P. S&P expects the default rate to climb to a peak of 14.3% in 2010. Distressed debt managers returns tend lag default rates and accelerate when default rates have peaked. A three to four year period of outperformance is usually measured from the peak of the distressed cycle. This is consistent with the bankruptcy processes of the developed markets such as Chapter 11 in the US. The risk remains that the economic recovery will be an insipid one and or that the economy may sink back into recession before it finds a stable trend path. Distressed debt managers also tend to be weakly correlated at the peak of the default cycle and maintain low correlation for about 3 years after which correlation creeps into their returns.

The events of 2008 have resulted in a peculiar situation where almost every hedge fund strategy is likely to perform well going forward. This is not to say that there is little or no risk. The choice before the investor remains the magnitude and the type of risk they are happy to assume. In liquid strategies such as equity long short, the risk is non-convergence, for there is often no functional relationship to bring relative value trades in line. For strong convergence, such as capital structure arbitrage strategies, convergence is less uncertain, at maturity or in default. However, under going concern assumptions, spreads can be volatile and can widen significantly and sometimes unpredictably. There is a trade off between market risk and liquidity risk.

At various times, the opportunity has shifted from asset class to asset class, from strategy to strategy, requiring a careful portfolio construction to capture the appropriate risk reward characteristics of each strategy, while achieving efficient portfolio diversification. Under current conditions, when risk reward properties of almost every strategy are favourable, the portfolio construction problem is significantly simplified.

Investor Risk Appetite:

In the first half of 2008 investors were content to be worried about their hedge fund allocations while remaining invested. Recall that for the year up till June 2008, hedge funds had turned in a moderately poor (-2.43%) performance. It was only when the losses accumulated and large regulated insurance companies and banks either went bankrupt or threatened to do so, did hedge fund investors decide to redeem in any size. The Madoff fraud further destroyed the trust between investors and their fund managers leading to the demonizing of the entire hedge fund industry not only within the industry but in the general medial as well. Redemptions crescendoed in March 2009 while hedge fund managers, some with liquidity mismatches or funding issues, began to restrict or suspend redemptions in an attempt to avoid disposing of assets at firesale prices.

Hedge fund investors’ reaction, quite understandable began with complacency in early 2008, to fear and panic in 3Q 2008 to despondency in 4Q 2008 and 1Q 2009. The rebound in markets and hedge fund performance took most investors by surprise.

As recently as April / May 2009, investors’ risk aversion remained acutely high. From early June 2009 this has changed somewhat as investors have begun to scout for opportunities in the hedge fund space. A number of things have changed since 2008. For one, investors will no longer tolerate liquidity mismatches, and while the immediate reaction has been to demand liquidity and favour liquid funds, a more discerning investor base is now analysing portfolio and strategy liquidity and requiring fund terms to better reflect the underlying liquidity.

The area of hedge fund fees has also come under scrutiny. While a number of funds have discounted their fees, it is unclear if there is any price elasticity. Price elasticity appears to be a weak factor compared with other factors such as manager quality, rational liquidity terms, transparency and operational integrity. In the area of fees, more sophisticated fees seem to be emerging which seek to better align investor and fund manager interests over a rolling investment horizon instead of the current annual fee crystallization which creates cyclicality in manager behaviour.

Transparency has become the most important issue for investors. Without transparency, due diligence and ongoing monitoring is blunted, style drift and frauds go undetected. Transparency goes beyond, and sometimes around, position level disclosure. More constructive forms of transparency include risk aggregation reports, sometimes sent by the fund administrator, periodic calls with the portfolio manager, periodic portfolio detail. The periodic preference for managed accounts has once again re-emerged. Quite whether it is sustained remains to be seen, but managed accounts while useful in some respects is no panacea.

As hedge funds react to investor needs, a stronger industry will arise, albeit initially a smaller one. It is hard to see growth rates regain their heights in 2007. However, given the relative outperformance of hedge funds versus long only equity, credit fixed income, commodities and real estate both in 2008 and over a 10 year period it is easy to underestimate the growth of the industry.


Please contact us if you have any questions or would like to start a hedge fund.  Other related hedge fund articles include:

MFA Releases Sound Practices Guide for Hedge Funds

Guide Focuses on Hedge Fund Risk Management and Other Operational Issues

Unfortunately the new world of hedge fund investing and hedge fund due diligence has become more complicated and hedge fund management companies now need to increase their focus on operational and business issues.  While many managers are happy to attend to their trading strategies and risk management procedures, the managers who will be able to grow their AUM most successfully in the coming years are those managers who focus on many of the business and operational issues which investors are now wholly concerned with.  The updated 2009 Sound Practices guide by the Managed Funds Association (press release below) provides an outline of the major issues which managers should address with respect to their businesses.

Overview of Sound Practices Guide

The Sound Practices guide is similar to the President’s Working Group report Hedge Fund Best Practices, but also includes more information for managers.  I skimmed through the Sound Practices guide (it is 277 pages) and found that much of the information is extremely useful.  One of the overarching themes of the guide is that it does not ask managers to take the “one size fits all” approach, but asks managers to individually assess whether or not a certain practice is appropriate for their particular business.

I found the section dealing with the disclosures and hedge fund offering documents particular good.  As a reminder to hedge fund managers, offering documents should be updated at least annually, or more frequently if there are material changes in the fund’s investment program, structure or management company.  Additionally, any changes to offering documents should be communicated to all existing investors (either by sending out a new PPM or through another type of disclosure).

Other sections I was particularly interested in were: (i) the section dealing with investor letters and communications, (ii) side letters and parallel separately managed accounts (which are becoming more popular), (iii) valuation and policies, (iv) risk management, (v) due diligence, (vi) AML.  A due diligence guide for hedge fund investors was also included, but I felt like this was a pretty weak DD questionnaire – managers are likely to receive much more detailed requests for information.

Recommendation for Hedge Fund Managers

I recommend that hedge fund managers who are immediately seeking capital from institutions and high net worth investors read through this Sound Practices guide and take notes.  Managers should reach each practice and asses whether it applies to their fund operations and, if so, how such a practice should be implemented.  Managers may want to highlight certain items and ask their attorney what they should do.  These sound practices will help managers to create strong businesses which are able to grow over the long run.



Managed Funds Association Takes Steps to Restore Investor Confidence with Enhanced Best Practices & Investor Due Diligence Recommendations

WASHINGTON, Mar 31, 2009 — Managed Funds Association (MFA) today took steps to restore investor confidence in the markets with the release of its newly enhanced Sound Practices for Hedge Fund Managers, including a due diligence questionnaire for investors to use as they consider whom to trust with their investments.

The 2009 edition of Sound Practices, MFA’s fifth version of its pioneering guidance that was first published in 2000, incorporates the recommendations provided in the final President’s Working Group’s (PWG) Best Practices for the Hedge Fund Industry Report of the Asset Managers’ Committee plus additional guidance that goes above and beyond the scope of those recommendations.

Richard H. Baker, MFA President and CEO, said, “The hedge fund industry has a strong role in helping to restore financial stability and investor confidence, and to hasten economic recovery. While policy makers consider sweeping regulatory reforms in the U.S. and abroad, and economic leaders gather for the G-20 in London, on April 2, the hedge fund industry is taking steps to restore investor trust through the promotion of sound business practices and tools for investors to use as they conduct ongoing due diligence of money managers.”

Sound Practices is the cornerstone of the Association’s initiative to collaborate with international organizations with the goal of establishing uniform global principles and guidance. MFA, the PWG Asset Managers’ Committee and the Alternative Investment Management Association (AIMA) have committed to providing the Financial Stability Forum (FSF) with a set of unified principles of best practices before April 30, 2009.

“The hedge fund industry recognizes its responsibilities as liquidity providers and risk dispersers in the markets, and continues to take the lead in its approach to disclosure and investor protection as well as active market disciplines such as risk management and valuation which contribute to market soundness and investor protection. This latest edition of MFA’s seminal Sound Practices concludes many months of diligent work by leading hedge fund managers, service providers and MFA staff to provide updates and revisions for voluntary adoption by hedge fund managers.

“MFA has a decade-long tradition of robust Sound Practices. Today, more than ever before, investors will benefit from our due diligence questionnaire as they undertake robust diligence when considering an investment in a hedge fund. Investors can also benefit from reviewing the recommendations in Sound Practices as they consider operational, governance and other matters as part of their diligence when making an investment.” added Baker.

The 2009 edition of Sound Practices provides comprehensive updates in every area of guidance including recommendations for disclosure and responsibilities to investors; valuation policies and procedures; risk management; trading and business operations; compliance, conflicts of interest, and business practices; anti-money laundering; and business continuity and disaster recovery practices.

Major Revisions

Sound Practices is a dynamic blueprint written by the industry, for the industry, to provide peer-to-peer guidance to:

  • Strengthen business practices of the hedge fund industry through a strong framework of internal policies and practices;
  • Encourage individualized assessment and application of recommendations on one size does not fit all; and
  • Enhance market discipline in the global financial marketplace.

The revised edition includes substantially updated and expanded guidance in seven areas:

  • Disclosure and Investor Protection: Establishes practices intended to assist a hedge fund in fulfilling its responsibilities to its investors;
  • Valuation: Establishes a framework, governance and policies and procedures for valuations of assets;
  • Risk Management: Establishes an overall approach to risk monitoring, measurement and management. Also describes types of risk and recommendations on management thereof;
  • Trading and Business Operations: Establishes policies and procedures for management of trading operations including relationships with counterparties, use of service providers, accounting, technology, best execution and soft dollar arrangements;
  • Compliance, Conflicts and Business Practices: Establishes guidance for the adoption of a culture of compliance including a code of ethics, compliance manual, record keeping, conflicts of interest, training/education of personnel and more;
  • Anti-Money Laundering: Updates MFA’s seminal AML guidance; and
  • Business Continuity/Disaster Recovery: Establishes general principles, contingency planning, crisis management and disaster recovery.

Baker noted that, “Ultimately, each hedge fund manager must determine whether and how to tailor these Sound Practices to its individual business. We believe that the strong business practices in Sound Practices are an important complement to a smart regulatory framework and that strong business practices and robust investor diligence are critical to addressing investor protection concerns.”

For a copy of Sound Practices please visit: www.managedfunds.org

About Managed Funds Association

MFA is the voice of the global alternative investment industry. Its members are professionals in hedge funds, funds of funds and managed futures funds, as well as industry service providers. Established in 1991, MFA is the primary source of information for policy makers and the media and the leading advocate for sound business practices and industry growth. MFA members include the vast majority of the largest hedge fund groups in the world who manage a substantial portion of the approximately $1.5 trillion invested in absolute return strategies. MFA is headquartered in Washington, D.C., with an office in New York. For more information, please visit: www.managedfunds.org


Other related hedge fund law articles include

Recommended Hedge Fund Articles for Start-up Hedge Fund Managers

Last week we posted our most popular hedge fund articles to date.  This week we are providing start up hedge fund managers with a “hedge fund manager start up guide” which consists of the most important articles for start-up (and existing) hedge fund managers.  The following article provide you with the background information you need to be prepared to begin the hedge fund formation process.

Our group has worked with over 200 start up hedge funds and hedge fund managers and we know the issues which managers are concerned about.  Please contact us if you have any questions on these articles.

Hedge Fund Presentation

  • Start Up Presentation – this voice-over presentation goes over most of the topics covered in the posts below.  The presentation is about 40 minutes long and discusses the basic issues involved in starting a hedge fund.

The Basics

Investors and Fees

Structural Issues

The Laws

Raising Hedge Fund Assets

Other Recommended

What is an accredited investor? Accredited investor definition

[2017 EDITORS NOTE: this article will be updated shortly.  Please note that the definition has changed and that the net worth requirement now carves out any equity or debt of a personal residence.]

Hedge fund managers can only admit certain investors into their hedge funds.  Most hedge funds are structured as private placements relying on the Regulation D 506 offering rules.  Under the Reg D rules, investors must generally be “accredited investors.”  Many hedge funds have additional requirements.

With regard to individual investors, the most common of the below requirements is the $1 million net worth (which does include assets such as a personal residence).   With regard to institutional investors, the most commonly used category is probably #3 below, an entity with at least $5 million in assets.  Please note that there may be additional requirements for your individual hedge fund so you should discuss any questions you have with your attorney.

The accredited investor definition can be found in the Securities Act of 1933.  The definition is:

Accredited investor shall mean any person who comes within any of the following categories, or who the issuer [the hedge fund] reasonably believes comes within any of the following categories, at the time of the sale of the securities [the interests in the hedge fund] to that person:

1. Any bank as defined in section 3(a)(2) of the [Securities] Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; any insurance company as defined in section 2(a)(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;

2. Any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940;

3. Any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;

4. Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer;

5. Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of his purchase exceeds $1,000,000;

6. Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;

7. Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii) and

8. Any entity in which all of the equity owners are accredited investors.