Hedge Funds: Investment Advisors Or Something Different?

Hedge funds are investment vehicles that pool money from investors to buy securities or other types of investments. They are often considered exclusive and risky, employing aggressive strategies such as leveraged, debt-based investing and short-selling. Due to the high level of risk, the U.S. Securities and Exchange Commission (SEC) regulates who can invest in them. Hedge fund managers, who are responsible for making investment decisions and overseeing operations, are usually required to register as investment advisors if the fund invests in securities and has a large number of assets under management. However, not all hedge fund managers need to register, and some may be exempt from certain requirements.

Hedge fund managers may need to register as investment advisors if they invest in securities

In the US, the Investment Advisers Act of 1940 requires hedge fund managers who oversee more than $100 million worth of investment assets to register as investment advisors at the federal level. Additionally, some states require official registration as an investment advisor and payment of a licensing fee, while most states require the Series 65 license.

To determine whether a hedge fund manager needs to register as an investment advisor, it is important to consider the following:

• The size of the fund: If the fund manages over $150 million in assets, including leverage, it will likely need to register with the Securities and Exchange Commission (SEC).
• The type of assets invested in: If the fund invests in securities, it will likely need to register. Funds that invest solely in commodities, futures, currencies, or certain real estate investments may not need to register.
• The location of the fund manager and investors: The state laws where the fund manager is physically located and where the investors are based will impact the registration requirements.
• Whether the fund manager advises separately managed accounts: If the fund manager advises individual clients in addition to managing pooled investment vehicles, this will trigger the requirement for investment advisor registration.

It is important to note that not all hedge fund managers are subject to investment advisor registration, and the specific requirements may vary depending on the jurisdiction. Hedge fund managers should consult with experienced securities counsel to determine their specific registration obligations.

Fund managers who advise separately managed accounts must register

Fund managers who advise on separately managed accounts (SMAs) must register as investment advisors. This is because SMAs are considered to be investment portfolios owned by individual investors, and are therefore subject to the Investment Advisers Act of 1940.

SMAs are managed by professional investment firms, who have discretionary powers to make investment decisions on behalf of the investor. This means that the investment firm can decide to buy or sell securities within the portfolio without the investor's consent. SMAs differ from mutual funds, where investors own shares of a collective portfolio. In contrast, SMA investors directly own the underlying securities in their portfolio.

SMA investors benefit from greater transparency, direct ownership of assets, and a more tailored investment strategy. They can also exclude certain investments based on personal preferences or ethical considerations. SMA investors must conduct due diligence before committing to a money manager, as their discretionary services can cost between 1% to 3% of the assets in the portfolio.

In the US, the majority of investment firms managing SMAs are called Registered Investment Advisors. These firms operate under the regulatory auspices of the Investment Advisers Act of 1940 and the U.S. Securities and Exchange Commission (SEC).

To determine whether a fund manager needs to register as an investment advisor, five questions should be asked:

• Will the fund invest in "securities"?
• Will the manager advise separately managed accounts?
• What will be the size of the fund?
• In which state is the fund manager physically located?
• In which states are the investors located?

Only funds that invest in securities are required to register as investment advisors. Advising on SMAs will trigger the requirement for RIA registration for fund managers that would otherwise be exempt. Additionally, advising SMAs lowers the SEC registration threshold for assets under management from $150 million to $100 million.

Therefore, fund managers who advise on separately managed accounts must register as investment advisors, unless they meet specific exemptions as outlined in the sources.

A fund manager with over $150 million in assets must register

> "any person who, for compensation, engages in the business of advising others, either directly or through publications or writings as to the value of securities or as to the advisability of investing in, purchasing or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analysis or reports concerning securities."

The $150 million threshold is based on the fund's total Regulatory Assets Under Management (RAUM), which includes proprietary assets, assets managed without receiving compensation, assets of foreign clients, and uncalled capital commitments. RAUM must be calculated on a gross basis, meaning that any outstanding debt or other liabilities cannot be subtracted from the total.

It is important to note that this requirement only applies to funds that invest in securities. Funds that invest solely in commodities, futures, currencies, or certain real estate investments would not be subject to investment adviser registration.

Additionally, there are certain exemptions from the SEC registration requirement that may apply. For example, the Private Fund Adviser exemption applies to advisers with less than $150 million in RAUM that solely advise qualifying private funds.

Failure to register when required to do so can result in significant legal and regulatory consequences, so it is important for fund managers to carefully consider their obligations and consult with legal and compliance experts as needed.

The state in which the fund manager operates determines registration requirements

The state in which a fund manager operates determines registration requirements. The registration obligations apply to any person or company that receives compensation for providing investment advice to a client. This includes all hedge fund managers.

In the US, hedge funds with regulatory assets under management of more than $100 million are required to register with the US Securities and Exchange Commission (SEC). Advisors with less than $150 million in regulatory capital under management who qualify for the private fund advisor exemption do not have to register with the SEC.

However, the state laws that determine the licensing requirements for local operating investment advisors vary. Some states require official registration as an investment advisor and payment of a licensing fee, while most states require the Series 65 license. Additionally, some states set a Series 7 license as a prerequisite for obtaining a Series 65 license.

In most states, hedge funds investing in securities with less than $150 million in assets under management must register as state investment advisors in the state where the manager's primary operations occur.

If a hedge fund manager is managing more than $100 million worth of investment assets, they are required to register as an investment advisor at the federal level per the Investment Advisers Act of 1940.

The Dodd-Frank Act's changes to the Investment Advisers Act of 1940 raised the lower limit for hedge fund advisors to register with the SEC from $25 million to $100 million. This change was implemented in Section 203(A)(II) of the Investment Advisers Act of 1940.

Dodd-Frank legislation also defined a new category of advisors, called mid-sized advisors, who have regulatory assets under management between $25 million and $100 million. An advisor of a mid-sized hedge fund does not have to register with the SEC but should be registered with the state where their principal office is located. If an advisor of a mid-sized hedge fund does not have adequate state regulation, that advisor would be required to register with the SEC.

A hedge fund manager may need to take the Series 65 exam and obtain a license

A hedge fund is a pool of funds from private investors, managed by professional hedge fund managers. Hedge funds are considered risky investments as managers use various strategies to earn profits and charge high fees.

Hedge fund managers are responsible for making investment decisions and overseeing the operations of a hedge fund. They are considered investment advisors and may need to register as such.

A hedge fund manager does not need a specific license to operate the hedge fund. However, depending on the state in which the fund is registered, the fund manager may need to obtain a Series 65 license. This license is required for investment advisors and is determined by state laws, which vary. Some states require official registration as an investment advisor, while others mandate the Series 65 license. Additionally, some states set a Series 7 license as a prerequisite for obtaining a Series 65 license.

The only universal license requirement for a hedge fund manager is an ordinary business license. If a hedge fund manager oversees more than $100 million worth of investment assets, they must register as an investment advisor at the federal level per the Investment Advisers Act of 1940.

It is important to note that hedge funds are loosely regulated investment vehicles as they mostly cater to accredited or high-net-worth investors. However, fund managers who oversee investor money will need to pass relevant exams, such as the FINRA Series 7 and state regulatory exams.

In summary, while a hedge fund manager may not need a specific license to operate, they may need to obtain a Series 65 license, depending on the state in which they operate and the value of the assets they manage. Additionally, they must comply with relevant regulations and pass certain exams to ensure they are qualified to oversee investor funds.

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