What is a Hedge Fund?

Hedge funds and other alternative investment funds developed on the basis of exceptions from the securities legislation enacted in the U.S. in the 1940s to regulate collective investment undertakings. The purpose of the exceptions was to exclude “private investment companies” and personal and family holding companies from the scope of legislation, but the SEC “knowingly permitted any group of up to 100 people to create a private investment pool.” The first hedge fund (A.W. Jones & Co.) and Venture Capitalist funds appeared, but it took almost two decades until they were named. Private equity funds appeared in 1970s on the basis of the same statutory safe harbor.

It is a simple process to enter the hedge fund industry; practically anyone with $15k to $20k can start a hedge fund and forming a hedge fund gets easier every year. It has become common for brokerages, attorneys, accountants and other financial professionals to team up in order to provide a one-stop-shop approach to developing and launching a hedge fund. Much of the consultation work is conducted over the phone, email and the internet. Key items needed to start a hedge fund are: money, a hedge fund consultant, an attorney, a prime broker, office space (or a home office), and eventually, an accountant and auditor.

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