Hedge Fund Oversight and Transparency

Unlike other investment pools — such as mutual funds — hedge funds typically are structured and operated in a way that allows them and their advisers to qualify for exemptions from certain federal securities laws and regulations, including mandatory registration and disclosure requirements.

Under the existing regulatory structure, the Securities and Exchange Commission and the Commodity Futures Trading Commission can provide direct oversight of registered hedge fund advisers and, along with federal bank regulators, monitor hedge fund-related activities conducted at their regulated entities.

Currently the SEC oversees an estimated 1,991 hedge fund advisers. This includes 49 of the largest U.S. hedge fund advisers, which account for approximately one-third of hedge fund assets under management.

As part of routine inspections, the SEC conducted approximately 321 examinations of registered advisers it believed to be involved with hedge funds. Deficiencies among those groups included: information disclosures, reporting, and filing — i.e. private placement memorandum was outdated; personal trading — i.e. quarterly reports were not filed or filed late for personal trading accounts; and compliance rules — i.e. policies and procedures were inadequate to address compliance risks.

Another important SEC activity is its supervision of regulated securities firms that conduct transaction with hedge funds.

Bank regulators, including the Federal Reserve and the FDIC, monitor hedge fund activities. Their role centers on the management practices of their regulated institutions' interactions with hedge funds as creditors and counterparties. Bank regulators examine the extent to which banks follow sound risk management practices.

Market participants also play an important role in keeping hedge funds in check. Investors, creditors, and counterparties impose market discipline on hedge funds by providing additional funding or better terms to hedge funds that are willing to disclose credible information about the fund's risks and prospective returns. In recent years, hedge fund advisers have taken steps to improve their disclosure practices in hopes of attracting institutional investors with fiduciary responsibilities like pension plans.