7.5 Hedge Funds & Private Equity
Hedge funds and private equity funds cater exclusively to wealthy institutional and accredited investors, utilizing aggressive strategies not permitted in standard mutual funds.
Key FINRA Exam Takeaways
- Unregistered private placement funds structured under Regulation D, exempt from the Investment Company Act of 1940.
- Restricted to Accredited Investors and Qualified Purchasers.
- Employ aggressive, high-risk strategies: massive leverage, short selling, concentrated derivative positions, arbitrage.
- Fee structure: Typically '2 and 20' (2% annual management fee plus 20% of net capital gains).
- High illiquidity: Subject to lock-up periods (e.g., 1 to 2 years) where redemptions are prohibited.
Accredited Investor Standards (Rule 501)
Individual net worth exceeding $1M (excluding primary residence), OR annual income exceeding $200,000 ($300,000 with spouse) in each of the past 2 years with reasonable expectation of the same, OR holding Series 7, 65, or 82 licenses in good standing.
Knowledge Checkpoint • Section 7.5
A registered representative is evaluating the suitability of a private hedge fund for a retail customer. Which of the following client profiles would meet the regulatory requirement to invest in the fund?