Hedge Fund

Structure

Most hedge funds are open-ended private funds. A common design is a master-feeder: a Delaware limited partnership feeder for US taxable investors, a Cayman Islands company feeder for non-US and US tax-exempt investors, and a master fund that trades. Standalone onshore funds also exist, as do UCITS and US registered "liquid alternative" funds running hedge-fund-like strategies; the latter are regulated retail products, not hedge funds in the private-fund sense.

Liquidity terms

Investors subscribe at NAV and may redeem on a stated frequency, commonly monthly or quarterly, after a notice period. Terms that restrict liquidity include lock-ups (hard, or soft with a redemption fee), fund-level or investor-level gates, side pockets for illiquid positions, holdbacks pending the audit, and suspension of NAV and redemptions in extreme cases. These terms are set out in the offering documents and are central to hedge fund due diligence.

Fees

A management fee on NAV and a performance fee or incentive allocation on net new profits, normally subject to a high-water mark so that losses must be recovered before a new fee is earned. Hurdles are less common than in private equity. Many large multi-manager platforms charge pass-through expenses, including portfolio-manager compensation, instead of, or in addition to, a fixed management fee. Fee levels vary by strategy, size and share class.

Jurisdiction and status (US)

The fund itself is not registered: it relies on section 3(c)(1) or 3(c)(7) of the Investment Company Act and sells interests in private placements, which in practice are usually limited to accredited investors. The SEC's investor education site describes hedge fund investors as accredited investors or qualified purchasers, depending on how the fund is structured, and a 3(c)(7) fund's securities must be owned exclusively by persons who were qualified purchasers when they acquired them. An adviser registered or required to be registered with the Securities and Exchange Commission (SEC) may charge a performance fee to a 3(c)(1) fund only if each investor charged that fee is a qualified client; contracts with 3(c)(7) funds are outside that restriction. For contracts entered into from 29 June 2026, the qualified client tests are at least $1.4 million managed by the adviser or more than $2.7 million of net worth. Registration applies to the adviser, not the fund. An adviser with its principal office and place of business in the US that advises only qualifying private funds and manages less than $150 million in private fund assets is exempt from SEC registration and files reports on Form ADV as an exempt reporting adviser. An adviser registered or required to be registered with the SEC that manages $150 million or more in private funds files Form PF at least annually, within 120 days of its fiscal year end. An adviser that, with its related persons, had $1.5 billion or more in hedge fund assets at the end of any month in the prior fiscal quarter (a large hedge fund adviser) instead files quarterly updates on its hedge funds within 60 days of each quarter end, and also files current reports on its qualifying hedge funds within 72 hours of specified events, a requirement that took effect on 11 December 2023. These Form PF thresholds and deadlines are stated as in force at 2 October 2026: a joint proposal of April 2026 by the SEC and the Commodity Futures Trading Commission (CFTC) (91 FR 22232) would raise the $150 million filing threshold to $1 billion and the large hedge fund adviser threshold to $10 billion, and would narrow the events that trigger a current report; it has not been adopted. The compliance date of the 2024 joint Form PF amendments is 1 July 2027.

Jurisdiction and status (EU)

A hedge fund in the EU that is not authorised as a UCITS is an alternative investment fund (AIF), and its manager an alternative investment fund manager (AIFM), under the Alternative Investment Fund Managers Directive (AIFMD). Non-EU hedge funds are usually marketed in individual member states under national private placement regimes: Articles 36 and 42 of the directive allow member states to permit marketing to professional investors in their territory only, subject to conditions. Under AIFMD II (Directive (EU) 2024/927), whose measures member states had to apply from 16 April 2026, a manager of an open-ended AIF, such as an open-ended hedge fund, must select at least two liquidity management tools from those listed in Annex V, points 2 to 8, and the selection cannot consist only of swing pricing and dual pricing.

Measuring performance

Because investors control subscriptions and redemptions, hedge fund performance is reported as a time-weighted return on NAV, not an IRR. Risk-adjusted measures such as the Sharpe ratio and drawdown are standard.

Not the same as

• Private Equity (PE): Private equity funds are typically closed-ended drawdown funds holding controlling stakes for years; hedge funds are typically open-ended and trade liquid or semi-liquid instruments.
• Fund of Funds (FoF): A fund of hedge funds allocates to several hedge funds and adds its own fee layer.
• Alternative Investments (Alternative Assets): Alternative assets is a broad category; hedge funds are one vehicle type within it.

How it is classified

• Hedge fund (vehicle): private pooled fund, open-ended, flexible trading mandate, management fee plus performance fee with high-water mark.
• If the vehicle is a registered mutual fund or UCITS pursuing similar strategies, classify as a liquid alternative fund, not a hedge fund.

Common mistakes

• Saying hedge funds "register with the SEC above $150 million". Funds do not register; the $150 million figure is the private fund adviser exemption threshold for the adviser.
• Saying all hedge fund advisers file Form PF quarterly. Among hedge fund advisers only large ones ($1.5 billion or more in hedge fund assets) do; the others file annually.
• Reporting hedge fund performance as an IRR, or comparing it with private equity IRRs.
• Treating Form D amounts as new capital commitments; Form D reports the total offering amount and the total amount sold (Item 13).

Edge cases

• A hedge fund that holds mostly illiquid credit or private positions may adopt drawdown-like terms, blurring the line with private credit funds.
• A family office that meets Rule 202(a)(11)(G)-1 (it has no clients other than family clients, is wholly owned by family clients and exclusively controlled, directly or indirectly, by family members and/or family entities, and does not hold itself out to the public as an investment adviser) is excluded from the Advisers Act definition of investment adviser, so it is not a hedge fund adviser in the regulatory sense.

External standards

Sources

1. Hedge Funds. U.S. Securities and Exchange Commission (Investor.gov), Accessed 2026-10-01. Status: current (checked 2026-10-01). Hedge Funds page: 'What are hedge funds?' and 'You must be an accredited investor or a qualified purchaser' — supports: Hedge funds are private, unregistered funds; depending on structure, investors must be accredited investors or qualified purchasers (T2, beside the T1 statute)
2. 15 U.S.C. 80a-3 - Definition of investment company (Investment Company Act sec. 3, incl. 3(c)(1) and 3(c)(7)). U.S. Congress (United States Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). Sec. 3(c)(1), 3(c)(7)(A) — supports: Investment Company Act exclusions relied on by hedge funds
3. 17 CFR 275.205-3 - Exemption from the compensation prohibition of section 205(a)(1) for investment advisers (qualified client). U.S. Securities and Exchange Commission (CFR text via eCFR; LII mirror), eCFR current as of 2026-09-29; last amended 86 FR 62475 (2021-11-10). Status: in force (checked 2026-10-01). 17 CFR 275.205-3(a), (b), (d)(1) — supports: Each equity owner of a 3(c)(1) fund charged a performance fee is a client; qualified client definition
4. Order Approving Adjustment for Inflation of the Dollar Amount Tests in Rule 205-3 under the Investment Advisers Act of 1940, Release No. IA-6961. U.S. Securities and Exchange Commission, Issued 2026-04-28; effective 2026-06-29. Status: in force (checked 2026-10-01). Sections II-III (effective 29 June 2026; not retroactive to earlier contracts) — supports: $1.4m assets-under-management and $2.7m net worth qualified client tests for contracts entered into from 2026-06-29
5. 17 CFR 275.203(m)-1 - Private fund adviser exemption. U.S. Securities and Exchange Commission (CFR text via eCFR; LII mirror), eCFR current as of 2026-09-29; last amended 2018-03-12. Status: in force (checked 2026-10-01). 17 CFR 275.203(m)-1(a) — supports: Private fund adviser exemption below $150m
6. 17 CFR 275.204(b)-1 - Reporting by investment advisers to private funds (Form PF filing obligation). U.S. Securities and Exchange Commission (CFR text via eCFR; LII mirror), eCFR current as of 2026-09-29; last amended 2025-03-12. Status: in force (2024 Form PF amendments not yet in compliance) (checked 2026-10-01). 17 CFR 275.204(b)-1(a), (e) — supports: Form PF filing obligation for registered advisers with at least $150m private fund assets; updates at least annually and more often as the instructions require
7. Form PF; Event Reporting for Large Hedge Fund Advisers and Private Equity Fund Advisers; Requirements for Large Private Equity Fund Adviser Reporting (final rule), Release IA-6297, 88 FR 38146. U.S. Securities and Exchange Commission (Federal Register via govinfo), Adopted 2023-05-03; published 2023-06-12; sections 5 and 6 effective 2023-12-11; remainder effective 2024-06-11. Status: in force (checked 2026-10-01). 88 FR 38146, DATES (sections 5 and 6 effective 2023-12-11) — supports: 72-hour current reports by large hedge fund advisers ($1.5bn+), effective 2023-12-11
8. Form PF; Reporting Requirements for All Filers and Large Hedge Fund Advisers; Further Extension of Compliance Date (joint final rule), 91 FR 56593. U.S. Securities and Exchange Commission and Commodity Futures Trading Commission (Federal Register via govinfo), Published and effective 2026-09-03. Status: in force (checked 2026-10-01). DATES: compliance date further delayed to 2027-07-01 — supports: 2024 Form PF amendments compliance date 2027-07-01
9. Directive (EU) 2024/927 amending Directives 2011/61/EU and 2009/65/EC (AIFMD II). European Parliament and Council, Official Journal of the EU, L series, 26.3.2024, Adopted 13 March 2024; Member States to adopt and apply measures by 16 April 2026 (some reporting provisions later). Status: In force; transposition deadline passed 16 April 2026; national transposition status varies by Member State (checked 2026-10-01). Art. 1(8) (inserting Directive 2011/61/EU Art. 16(2b)); Annex V points 2-8; Art. 3(1) — supports: A manager of an open-ended AIF selects at least two liquidity management tools from Annex V points 2-8 (gate, extension of notice periods, redemption fee, swing pricing, dual pricing, anti-dilution levy, redemption in kind), not swing and dual pricing alone; suspension and side pockets are listed separately; applies from 16 April 2026
10. 17 CFR 275.202(a)(11)(G)-1 - Family offices. U.S. Securities and Exchange Commission (CFR text via eCFR; LII mirror), eCFR current as of 2026-09-29; adopted 2011 (76 FR 37994), amended 2016 (81 FR 60457). Status: in force (checked 2026-10-01). 17 CFR 275.202(a)(11)(G)-1(a), (b)(1)-(3) — supports: Family office exclusion and its three conditions
11. 15 U.S.C. 80b-5 - Investment advisory contracts (Advisers Act s.205). U.S. Congress (US Code via LII), Current US Code text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). Sec. 205(a)(1), (b)(4) — supports: Performance-fee restriction for advisers registered or required to be registered; contracts with 3(c)(7) funds excepted
12. Form PF (reference copy): General Instructions and Glossary. U.S. Securities and Exchange Commission, Reference copy posted at sec.gov/files/formpf.pdf, OMB No. 3235-0679; includes Sections 5 and 6 added by the 2023 amendments. Status: current (checked 2026-10-01). General Instructions 3 (Section 2 threshold) and 9 (filing frequency); Section 5 introduction — supports: $1.5bn hedge fund assets (with related persons, any month-end of the prior fiscal quarter); quarterly updates within 60 days for large hedge fund advisers, annual within 120 days for others; current reports within 72 hours
13. Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMD). European Parliament and Council, Official Journal of the EU, L 174, 1.7.2011, Adopted 8 June 2011; transposition by 22 July 2013. Status: In force; amended by Directive (EU) 2024/927 (AIFMD II) (checked 2026-10-01). Art. 4(1)(a)-(b), Art. 36(1), Art. 42(1) — supports: AIF and AIFM definitions; member states may allow marketing of non-EU AIFs, and of AIFs managed by non-EU AIFMs, to professional investors in their territory without a passport
14. 17 CFR 275.204-4 - Reporting by exempt reporting advisers. U.S. Securities and Exchange Commission (CFR text via eCFR; LII mirror), eCFR current as of 2026-09-29; no substantive amendment since eCFR baseline. Status: in force (checked 2026-10-01). 17 CFR 275.204-4(a) — supports: Advisers relying on the 203(l) or 203(m) exemption file reports on Form ADV (exempt reporting advisers)
15. Form D - Notice of Exempt Offering of Securities (form and instructions, paper version). U.S. Securities and Exchange Commission, SEC1972 (5/17); OMB No. 3235-0076, expires 2027-07-31. Status: in force (checked 2026-10-01). Item 13 (Offering and Sales Amounts) — supports: Form D reports total offering amount, total amount sold and total remaining to be sold
16. Form PF; Reporting Requirements for All Filers (joint proposed rules), 91 FR 22232. U.S. Securities and Exchange Commission and Commodity Futures Trading Commission (Federal Register via govinfo), Proposed 2026-04-20; published 2026-04-24; comments due 2026-06-23. Status: proposed (checked 2026-10-01). SUMMARY; sections II.A-B (filing threshold $150m to $1bn; large hedge fund adviser threshold $1.5bn to $10bn); section 5 current-report changes — supports: Pending April 2026 SEC/CFTC proposal to raise Form PF thresholds and narrow current reporting (not adopted at 2 October 2026)

• Master-Feeder Structure
• Redemption
• Form PF
• Hedge Fund Strategies
• Side Pocket
• Redemption Gate
• Lock-Up Period

• Alternative Investments (Alternative Assets)
• Open-End Fund
• Two and Twenty