Registered investment adviser compliance in a hedge fund environment

Abstract

Purpose

The purpose of this article is to explore what the author believes to be some of the key challenges facing hedge fund managers that are preparing for registration with the Commission under the Investment Advisers Act of 1940 (“Advisers Act”).

Design/methodology/approach

Discusses marketing issues, including promotional use of track records from predecessor firms, use of target returns, use of selected investment performance, explicit or implicit promises of low volatility, and promises of specific fund characteristics. Discusses protection and proper use of fund assets, including asset safeguarding policies and procedures, and allocating expenses to funds. Discusses managing material, non‐public information; valuation of fund assets; side letters; and compliance program requirements.

Findings

The impacts of the new requirements will be significant for many hedge fund managers. Unregistered hedge fund managers will soon become subject to the full scope of the Advisers Act, including detailed compliance program requirements, obligations, and restrictions with respect to marketing, affiliated transaction prohibitions and restrictions, custody requirements, books and records creation and retention obligations, and a broad array of other standard and situational requirements. The organizations that meet these challenges successfully will be those that understand their risk profiles, foster top‐down “cultures of compliance,” and dedicate sufficient human and other resources to develop appropriate compliance programs and to monitor and continuously evaluate their exposures to potential compliance issues.

Originality/value

Provides a useful discussion of what the author believes to be some of the most important regulatory concerns and challenges faced by hedge fund advisers as they prepare for a new regulated environment.

Citation

Scott, D.E. (2005), "Registered investment adviser compliance in a hedge fund environment", Journal of Investment Compliance, Vol. 6 No. 2, pp. 20-29. https://doi.org/10.1108/15285810510644857