The Fund of Hedge Funds Regulatory Loophole

From a regulatory perspective, both in the United States and abroad, a hedge fund is essentially the same type of legal entity as a fund of hedge funds (FOHF).  As such all of the current and proposed hedge fund regulations apply virtually the same legal and compliance standards to both hedge funds and fund of hedge funds.  While such a distinction may have been too fine a regulatory point to make during the early stages of the modern hedge fund resurgence, this distinction can no longer be ignored.  Fund of hedge funds aggregate capital and allocate it to hedge funds.  They are supposed to be performing a certain minimum amount of due diligence (both investment and operational).  Unfortunately, as Madoff and the current Ponzimonium have demonstrated, FOHF were not performing such due diligence adequately.  All of the proposed hedge fund regulations dangerously ignore the opportunity to protect investors and institutions which place their capital within this lax due diligence framework.  In a guest article, Jason Scharfman, Managing Partner of Corgentum Consulting, LLC, critiques what he calls the “fund of hedge funds regulatory loophole.”

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