Regulation D Scholarly Articles

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Regulation D Related Scholarly Compositions

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The Art of Investing in Hedge Funds: Fund Selection and Optimal Allocations
by Carol Alexander & Anca Dimitriu
ISMA Centre, University of Reading, UK
2004

Abstract
WIth institutional investors increasingly involved in alternative investments, portfolio optimisation within a large universe of hedge funds has become a key area for research. This paper develops a portfolio construction model that is specifically designed for funds of hedge funds, incorporating specific controls for operational limitations, data biases and incompleteness. Absolute performance is targeted by selecting funds according to their relative abnormal return, alpha...

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The Brave New World of Hedge Fund Indices
by Noël Amenc and Lionel Martellini
October 19, 2002

Abstract
The fact that hedge funds have started to gain widespread acceptance while remaining a somewhat mysterious asset class enhances the need for better measurement and benchmarking of their performance. One serious problem is that existing hedge fund indices provide a somewhat confusing picture of the investment universe. In this paper, we first present detailed evidence of strong heterogeneity in the information conveyed by competing indices. We also attempt to provide remedies to the problem and suggest various methodologies designed to help build a “pure style index”, or “index of the indices” for a given style. We first explore a statistical approach to the construction of pure style indices, using Kalman filter techniques for the estimation of an unobservable factor from competing index return observations. Because it is desirable that a pure index can be regarded as a portfolio of existing indices, and hence a portfolio of underlying funds, we also suggest a portfolio approach to the problem. In particular, we suggest to use principal component analysis to extract the “best possible one-dimensional summary” of a set of competing indices, and to use minimum variance analysis to extract the “least biased portfolio” from a set of competing indices. Finally, we also provide evidence of the ability of pure style indices to improve benchmarking of hedge fund returns. Our results can easily be extended to traditional investment styles such as growth/value, small cap/large
cap.

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Economic Consequences of SEC Disclosure Regulation
by Brian J. Bushee & Christian Leuz
The Wharton Financial Institutions Center
February, 2003

Abstract
This paper examines the economic consequences of SEC disclosure regulation. We exploit a recent regulatory change mandating firms on the OTC Bulletin Board to comply with the reporting requirements under the Securities Exchange Act of 1934. This change substantially increases the amount and enforcement of required disclosures for firms that previously did not file with the SEC...

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Flows, Performance, and Managerial Incentives in the Hedge Fund Industry
by Vikas Agarwal, Naveen D. Daniel, & Narayan Y. Naik
Georgia State University & London Business School
September 1, 2003

Abstract
Using a comprehensive database of individual hedge funds and funds of hedge funds, we investigate the determinants of money-flow and performance in the hedge fund industry. We have several important findings. First, good performers in a given year experience significantly larger money- flows in the subsequent year and this performance- flow relation is convex...

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Hedge Funds Indices: An Evaluation in a Downside Risk Framework
by Marcus Andersson & Jonas Jerkander
School of Economics and Commercial Law - Gothenburg University
June, 2004

Abstract
The aim of this master thesis was to examine the different hedge fund strategies in terms of risk, return and risk-adjusted return, in order to conclude whether the hedge fund’s strategy affect the fund’s performance. We have used an alternative evaluation framework, namely Downside risk. We have applied this technique on our fourteen evaluated hedge fund strategies to conclude whether the strategy is important for the funds risk and return characteristics...

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Hedge Fund Returns: Auditing and Accuracy
by Stephen J. Brown, William N. Goetzmann, & Bing Liang
New York University, Yale School of Management, & Case Western Reserve University
March, 2002

Abstract
In this paper, we investigate data accuracy for hedge funds and explore reasons why discrepancy in fund returns exists across different databases. Although majority hedge funds have auditors, a significant proportion of the audit dates are missing. Therefore, hedge fund returns are not effectively audited. We find that audited funds have a much lower return discrepancy than non-audited funds. There is some evidence that funds that are audited by the Big Five firms have better return quality than those that are audited by non Big Five firms. There is a significantly positive correlation between the auditing variable and fund size. Large funds tend to be audited while small funds tend not to be. Funds listed on exchanges, fund of funds, funds with broad investors, funds open to the public, funds invested in a single industrial sector, and unleveled funds have better data
quality than the other funds.

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The Risks Underlying Hedge Funds Strategies
by Maha Soueissy & Rami Sidani
Universite de Lausanne
December, 2003

Abstract
This paper establishes a theoretical risk matrix based on 23 different hedge funds
strategies and their underlying risk factors. It studies in parallel the impact of some of the major market crises of the last decade on ten of the largest hedge funds strategies. Dominant risks are identified for each crisis and each hedge fund style and put into matrices...

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The Wealth Effects of Private Stock Placements under Regulation D
by Kasim L. Alli & Donald J. Thompson, II
1993

Abstract
This paper examines the wealth effects associated with unregistered private common stock placements under the Regulation D exemption by a sample of exchange listed and over the counter firms. Unlike the negative abnormal returns associated with public equity offerings, private placements of common stocks under Regulation D are initially associated with significantly positive abnormal returns. However, these firms experience significant negative price effects in the two years following the private placements...

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Definitions

HEDGE FUND RISK AND OTHER DISCLOSURES

Hedge funds, including fund of funds (“Hedge Funds”), are unregistered private investment partnerships, funds or pools that may invest and trade in many different markets, strategies and instruments (including securities, non-securities and derivatives) and are NOT subject to the same regulatory requirements as mutual funds, including mutual fund requirements to provide certain periodic and standardized pricing and valuation information to investors. There are substantial risks in investing in Hedge Funds. Persons interested in investing in Hedge Funds should carefully note the following:

Hedge Funds represent speculative investments and involve a high degree of risk. An investor could lose all or a substantial portion of his/her investment. Investors must have the financial ability, sophistication/experience and willingness to bear the risks of an investment in a Hedge Fund.
An investment in a Hedge Fund should be discretionary capital set aside strictly for speculative purposes.
An investment in a Hedge Fund is not suitable or desirable for all investors. Only qualified eligible investors may invest in Hedge Funds.
Hedge Fund offering documents are not reviewed or approved by federal or state regulators
Hedge Funds may be leveraged (including highly leveraged) and a Hedge Fund’s performance may be volatile
An investment in a Hedge Fund may be illiquid and there may be significant restrictions on transferring interests in a Hedge Fund. There is no secondary market for an investor’s investment in a Hedge Fund and none is expected to develop.
A Hedge Fund may have little or no operating history or performance and may use hypothetical or pro forma performance which may not reflect actual trading done by the manager or advisor and should be reviewed carefully. Investors should not place undue reliance on hypothetical or pro forma performance.
A Hedge Fund’s manager or advisor has total trading authority over the Hedge Fund.
A Hedge Fund may use a single advisor or employ a single strategy, which could mean a lack of diversification and higher risk.
A Hedge Fund (for example, a fund of funds) and its managers or advisors may rely on the trading expertise and experience of third-party managers or advisors, the identity of which may not be disclosed to investors
A Hedge Fund may involve a complex tax structure, which should be reviewed carefully.
A Hedge Fund may involve structures or strategies that may cause delays in important tax information being sent to investors.
A Hedge Fund may provide no transparency regarding its underlying investments (including sub-funds in a fund of funds structure) to investors. If this is the case, there will be no way for an investor to monitor the specific investments made by the Hedge Fund or, in a fund of funds structure, to know whether the sub-fund investments are consistent with the Hedge Fund’s investment strategy or risk levels.
A Hedge Fund may execute a substantial portion of trades on foreign exchanges or over-the-counter markets, which could mean higher risk.
A Hedge Fund’s fees and expenses-which may be substantial regardless of any positive return- will offset the Hedge Fund’s trading profits. In a fund of funds or similar structure, fees are generally charged at the fund as well as the sub-fund levels; therefore fees charged investors will be higher that those charged if the investor invested directly in the sub-fund(s).
Hedge Funds are not required to provide periodic pricing or valuation information to investors.
Hedge Funds and their managers/advisors may be subject to various conflicts of interest.

The above general summary is not a complete list of the risks and other important disclosures involved in investing in Hedge Funds and, with respect to any particular Hedge Fund, is subject to the more complete and specific disclosures contained in such Hedge Fund’s respective offering documents. Before making any investment, an investor should thoroughly review a Hedge Fund’s offering documents with the investor’s financial, legal and tax advisor to determine whether an investment in the Hedge Fund is suitable for the investor in light of the investor’s investment objectives, financial circumstances and tax situation.

All performance information is believed to be net of applicable fees unless otherwise specifically noted. No representation is made that any fund will or is likely to achieve its objectives or that any investor will or is likely to achieve results comparable to those shown or will make any profit at all or will be able to avoid incurring substantial losses. Past performance is not necessarily indicative, and is no guarantee, of future results.

The information on the Site is intended for informational, educational and research purposes only. Nothing on this Site is intended to be, nor should it be construed or used as, financial, legal, tax or investment advice, be an opinion of the appropriateness or suitability of an investment, or intended to be an offer, or the solicitation of any offer, to buy or sell any security or an endorsement or inducement to invest with any fund or fund manager. No such offer or solicitation may be made prior to the delivery of appropriate offering documents to qualified investors. Before making any investment, you should thoroughly review the particular fund’s confidential offering documents with your financial, legal and tax advisor and conduct such due diligence as you (and they) deem appropriate. We do not provide investment advice and no information or material on the Site is to be relied upon for the purpose of making investment or other decisions. Accordingly, we assume no responsibility or liability for a ny investment decisions or advice, treatment, or services rendered by any investor or any person or entity mentioned, featured on or linked to the Site.

The information on this Site is as of the date(s) indicated, is not a complete description of any fund, and is subject to the more complete disclosures and terms and conditions contained in a particular fund's offering documents, which may be obtained directly from the fund. Certain of the information, including investment returns, valuations, fund targets and strategies, has been supplied by the funds or their agents, and other third parties, and although believed to be reliable, has not been independently verified and its completeness and accuracy cannot be guaranteed. No warranty, express or implied, representation or guarantee is made as to the accuracy, validity, timeliness, completeness or suitability of this information.

Any indices and other financial benchmarks shown are provided for illustrative purposes only, are unmanaged, reflect reinvestment of income and dividends and do not reflect the impact of advisory fees. Investors cannot invest directly in an index. Comparisons to indexes have limitations because indexes have volatility and other material characteristics that may differ from a particular hedge fund. For example, a hedge fund may typically hold substantially fewer securities than are contained in an index. Indices also may contain securities or types of securities that are not comparable to those traded by a hedge fund. Therefore, a hedge fund’s performance may differ substantially from the performance of an index. Because of these differences, indexes should not be relied upon as an accurate measure of comparison.