Hedge Fund Operations vs. Traditional Investment Management: Key Differences

Hedge fund investment management differs from the management of a regulated investment management company in several ways. The chief difference between the two is the way in which securities laws and regulations are applied. Hedge funds operating in the United States are not subject to the restrictions set forth in the Investment Company Act of 1940.

Operations of a Hedge Fund

A hedge fund operates in order to provide higher returns and invests in riskier assets. They protect against potential losses and market downturns. The design of a hedge fund gives it greater flexibility to engage in the investment of derivatives, short selling techniques, credit default swaps and other types of investments that would not be permissible with mutual funds.

Regulatory Restrictions

The Investment Company Act of 1940 set forth specific rules as to how mutual funds, publicly-traded funds, unit investment trusts and other types of investment companies were allowed to operate. The rules under the Act set forth the way in which investment companies were organized, how income was distributed and what reporting requirements. The rules of the act do not apply to hedge fund operations because they were never required to register.