Registered Hedge Funds are hedge funds registered with the SEC under the Investment Company Act of 1940, which offers several advantages to the fund. One large advantage is the lifting of restrictions on the number of investors allowed in the fund. Investors benefit from a marginal increase in transparency, as the fund is required to file occasional reports with the SEC.

Q. So we know that, until recently, nearly all hedge funds have been private vehicles, even secretive. So what are registered hedge funds?
A. These are hedge funds that are registered with the SEC under what people call the ’40 Act. This is the same law that covers mutual funds and other investment companies. Very simply put, the idea is that private hedge funds can have only a limited number of investors—one hundred, or in special cases five hundred—whereas registered hedge funds can have an unlimited number. That’s the big reason they’re attractive to hedge fund managers.

Q. Wait. So, this trend is not connected to the new Dodd Frank rules that require investment managers to become registered?
A. Great question, because there’s a lot of confusion about this. But they are two different things. Hedge funds are managed by investment managers. Dodd Frank requires a lot of those managers to be registered with the SEC for the first time. But here, we’re talking about the underlying hedge fund itself being registered.

Q. OK. You mentioned one of these can have an unlimited number of investors, so that’s good for the manager. But are there advantages for investors, too?
A. Very definitely. First, these are simply more accessible: registered hedge funds will take investments as small as $25k, rather than the $1mm minimum investment you often see with private funds. Also, they also make investments from an IRA much easier. And, obviously, registration with the SEC provides additional investor protections regarding independent oversight and conflicts of interest; it’s just a peace of mind thing.

Q. Sounds good. But, just to be clear, why can’t investors make small investments in private hedge funds?
A. Legally they could, but the math doesn’t work for the hedge fund manager. If you can only have 100 investors, you need large minimums per investor so your total AUM gets up to something where you can afford to run the fund. {For example, 100@50k = $5mm; the typical 2% management fee on that would be just 100k}. But with an unlimited number of investors, taking smaller investments works fine.

Q. Makes sense. So, then, can registered hedge funds be bought and sold like mutual funds or ETFs?
A. Ah, no. Generally, they still must be sold only to accredited investors through private placements, which are terms we can discuss another day. So these are still not a true “retail” product. But they have significant advantages for both managers and investors, so are suddenly becoming a hot topic.