Viewing Question: What is a 40 act fund and is it right for me?

1 Response

  1. Mutual funds started to gain prevalence in the 1920s leading to a influx of additional money into the stock market, and helping to exacerbate the crash of 29 and the depression. In part in response to this, the SEC created the Investment Companies Act of 1940 to regulate mutual funds. This act created reporting requirements and rules for how mutual funds could be formed, invested, and reported.

    Fast forward sixty-five years, and we begin to see a new investment structure becoming significant. That new structure is the hedge fund – a lightly regulated structure that allowed large investors to pool their money and invest in more exotic and sophisticated investments than traditional mutual funds allowed. Some hedge funds are very unrestricted and aggressive high-risk high-return strategies. Others take on lower risk, and arbitrage strategies that a normal investment portfolio won’t be able to access. As such, many large Aggressive hedge funds get the most press, and these were all the rage in the 00’s as managers delivered impressive results in the midst of a bull market.

    The great financial crisis took a lot of the wind out of the hedge funds’ sails, however they were here to stay. Alternative assets have become an increasingly important part of large investors’ portfolios. They are being used to diversify strategies in portfolios. However, to qualify for the lightly regulated hedge fund status, the funds have to limit the number of investors and have to qualify their investors. A typical individual investor is not usually able to access a hedge fund, and even if they can, they usually have enough money to invest for the hedge fund to want them. There have been different approaches to skirt these. One of these has been the 40 act fund – where companies offer hedge fund strategies as mutual funds. Many types of hedge funds can’t be offered as 40 act funds, but some can.

    Whether a 40 act fund is right for you is a question you need to talk to an experienced advisor about. Depending on the fund, your needs, and your strategies, a fund might or might not be appropriate.

Leave a Reply