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Legal Framework For Hedge Fund Regulation
Legal Framework For Hedge Fund Regulation
There is no statutory definition of the term “Hedge Fund.” The industry accepted
definition is that they are privately offered investment vehicles in which the contributions of
the high net worth participants are pooled and invested in a portfolio of securities,
commodity futures contracts, or other assets. Investors are typically able to redeem their
investments on a quarterly, semi-annual or annual basis. A high net worth participant (or a
qualified purchaser) as defined by Securities Exchange Commission (SEC) is an individual
with an asset base of $ 1 million dollars and an institution or a fund or a trust with an asset
base of $ 5 million. Apart from this statutory limit, investment in hedge funds is largely the
preserve of sophisticated investors who possess the required knowledge to assess the risks
associated with investing in this asset class.
Though the original purpose of hedge funds was to invest in equity securities and use
leverage and short selling to “hedge” the portfolio's exposure to movements of the equity
market, this remit has altered. Today, hedge fund advisers use labyrinthine investment
strategies and techniques to increase investor returns and many are very active in the trading
of securities, representing between nearly 20% of equity trading volume in the US securities
market.
Regulating the Hedge Funds
The most clamorous reasons cited by the votaries of regulating the Hedge Fund
industry is the incredible growth of hedge funds and the increased influence and power that
hedge funds are having on the financial markets. The industry is attacked for being secretive,
engaged in risky behavior and capable of unduly influencing global economies and corporate
activities. An increase in fraud cases involving hedge fund advisers, juxtaposing with an
increase in exposure of unsophisticated small investors to the risks of hedge fund investing
has enticed the policymakers and regulators to bring the hedge fund industry under greater
scrutiny. Hedge Funds were largely held responsible for the South East Asian Economic
crises in the late 1990s, the failure of the Long Term Capital Management Fund in the US in
1990s and its subsequent $ 3.5 billion bailout by the Federal Reserve Bank to prevent the
cascading collapse of global financial markets; and the current surge of the Bombay Stock
Exchange SENSEX, which even surprised the Indian Finance Minister as to comprehend