Hedge Funds

Timothy Peterson

Until very recently, US regulators could see only a portion of the financial landscape comprising hedge fund and other private fund advisers. Data on private funds was limited to those advisers who voluntarily registered with the SEC or were required to do so because, for example, they also managed a mutual fund. The Dodd–Frank Act required fund and other private fund advisers, for the first time, to register. The total number of registered advisers to private funds in the US is known to be over 4,000, accounting for roughly 40% of all advisers registered with the SEC. However, it is under half the estimated number of hedge funds globally.

We start this chapter with a discussion about how a hedge fund is different from a private fund, side letters and side pockets. We then provide an overview of common hedge fund strategies. Lastly, we touch on several standard setting bodies exclusive to the hedge fund industry.

WHAT IS A HEDGE FUND?

The term “hedge fund” is not formally defined by statute or regulation. Initially, the term referred to an investment pool with the ability to hedge downside risk through derivatives or short positions. Most hedge funds were small, and part