A hedge fund is a limited partnership that is open only to sophisticated investors. Sophisticated investors include financial institutions, pension fund managers, some charities and trusts, and a few individuals. Hedge funds are not required to register with the SEC.
Individuals who qualify as sophisticated investors must meet one of two criteria:
6. “a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
7. a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or …”[1]
It’s possible to be very wealthy and not understand anything about financial instruments, hedge funds, or anything related to financial markets. To a certain degree, hedge funds are designed to transfer wealth from those individuals to the fund managers.
[1] Source: http://www.sec.gov/answers/accred.htm.
