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What is Hedge Fund Compliance?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 15 September 2016
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Hedge fund compliance is conformity with rules pertaining to hedge fund operations. While hedge funds are not as heavily regulated as some types of investment funds, there are some regulations in place and compliance is necessary to continue operating. Depending on how a nation's financial regulations are set up, a hedge fund may be required to have a compliance program to demonstrate its commitment to addressing regulations pertaining to the operation of the fund.

In a hedge fund compliance program, an officer is appointed to supervise compliance requirements. This officer must keep up with rules and regulations targeting hedge funds, including changes to existing rules. The officer supervises the fund's activities to confirm they comply with laws about advertising, the types of clients a hedge fund can accept, and so forth. A team of personnel may work in support to provide full coverage in all areas of potential concern.

Compliance officers may be attorneys, people with extensive experience in the financial markets, or hedge fund experts. They must understand all aspects of hedge fund operation in addition to being able to read regulations in full and comprehend their meaning. The traditional loose regulation of hedge funds does not mean such funds go entirely unregulated and compliance can be especially key when the stakes are high. Losses in a hedge fund, in addition to hurting investors, can potentially cause an economic domino effect.

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Hedge funds found to be noncompliant can be subjected to fines and other penalties. In addition, they can expose themselves to legal liabilities. While hedge fund investors are experienced and understand the corresponding increased risk of hedge fund investments, funds that breach their fiduciary duty or violate the law can be held liable for investor losses. Investors can view a hedge fund compliance program as an advertising point indicating the fund will be working to comply with the law with the use of audits and other measures.

Regulations allow hedge funds to engage in much riskier investment activities. They are typically limited to wealthy investors under the assumption that wealthy individuals have a better understanding of the risks involved and can better weather the potential losses. Hedge fund compliance covers everything from how hedge funds can advertise to how the money invested in the fund must be handled. There are numerous guides to compliance in publication and people can also take workshops and classes to learn about hedge fund compliance and develop skills for use in a compliance program.

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