Performance hedge funds are strictly private, only available to a select number of investors. This select number of investors is known as accredited investors, a term which is used by the Securities and Exchange Commission (SEC). The SEC, created by the Securities Exchange Act of 1934, acts as a quasi-judicial instrument in regulating and overseeing securities trading in the United States. To be eligible as accredited investors, or qualified investors, the investors must have an annual income of more than $200, 000. This income must have been established for two consecutive years or more and be expected to remain stable. Additionally, the individual net worth of each of these investors must total more than one million dollars. Investors must be associated with corporate treasuries, endowments, private banks or other professional financial entities. Furthermore, investments in performance hedge funds must meet a minimum amount in which the average person cannot possibly afford without harming his financial standing. In fact, the Securities and Exchange Commission (SEC) dictates that the category of investors in performance hedge funds must be affluent as well as experienced in the world of financial investments and be able to fully manage the risks associated with less regulated funds.
Differing from performance hedge funds, retail investment funds are offered to the general public. Unlike performance hedge funds, retail investment funds, such as mutual funds, pension funds, and insurance companies, are subject to strict regulation by the SEC. Retail funds are also limited by the SEC to holding a particular selection of financial assets which may include the following: equities, bonds, and money markets. The SEC has set guidelines for the protection of the general public regarding these funds by requiring companies to disclose fully all facts regarding investments. They also must file a registration statement that contains pertinent financial information and must file regular reports with the SEC. Unlike retail investment funds, performance hedge funds are not required to file reports or comply with registration requirements.
In performance hedge funds, the main objective is maximizing the return on investments and incurring minimal risks. However, certain risks are always inevitable since the managers of these hedge funds are essentially gambling, speculating concerning the likelihood of high performance returns and, thus, high profits. Any opportunity in the market which appears to offer striking returns with diminished risks will always appeal to those who invest in performance hedge funds. Of course, investment funds may offer investors more protection than performance hedge funds due to the SEC’s regulations. However, to accredited investors, performance hedge funds with the promise of high return performance make the risks worth it.