1.  A Hedge Fund Manager should create a management environment that fosters a culture of compliance and should devote adequate internal resources to compliance with all laws, rules and regulations applicable to its business operations and market conduct.

1.  A Hedge Fund Manager, regardless of its registration status with a regulatory agency, is required to comply with a wide variety of laws, rules, and regulations (including those of local, state, federal, and international jurisdictions). These laws, rules, and regulations may include market surveillance requirements, which provide that a Hedge Fund Manager or Hedge Fund must furnish information and reports to regulators in connection with its trading and investment activities.

A Hedge Fund Manager registered with a regulatory body, such as the SEC, the Commodity Futures Trading Commission (“CFTC”), or with like-regulatory bodies in non-U.S. Jurisdictions, is subject to specific obligations that a non-registered Hedge Fund Manager is not.

A non-registered Hedge Fund Manager should evaluate which of the various laws, rules, and regulations are applicable to it despite its non-registered status (e.g., anti-fraud rules). A non-registered Hedge Fund Manager should also evaluate non-mandatory laws, rules, and regulations and determine as a matter of policy whether complying with them may assist in the furtherance of its compliance program for its business and investment activities. 

Overall, a Hedge Fund Manager should, in reliance on its internal and external resources (including prime brokers, administrators, attorneys, and accountants), ensure that its personnel are cognizant of, and adequately trained to comply with, the laws, rules and regulations applicable to its business operations, as well as those of the Hedge Funds it manages. The regulatory environment for Hedge Funds and Hedge Fund Managers is evolving. Accordingly, a Hedge Fund Manager, using internal resources and/or external service providers, should be vigilant in ensuring that it monitors any developments with respect to laws, rules, and regulations to which it, or the Hedge Funds it manages, may be subject.

A Hedge Fund Manager should ensure that its policies and procedures are updated periodically and that its personnel are appropriately trained.  A Hedge Fund Manager should monitor regulatory developments through consultations with attorneys and other advisers and through reviews of the various pronouncements issued or published by regulatory bodies (including self-regulatory organizations) and relevant trade groups or associations, such as MFA.

2.  The policies and procedures of a Hedge Fund Manager with regards to international operations or investment activity should be geared to comply with laws, rules and regulations in all jurisdictions in which it conducts trading activities or business.

2.  A Hedge Fund Manager’s policies and procedures should take into account the requirements of the jurisdictions in which it and the Hedge Funds it manages conduct business or investment activities.  Each jurisdiction may have laws, rules and regulations that govern market conduct, filings or reports, anti-money laundering (“AML”) or “know your customer” rules, private placements, marketing, etc.

3.  A Hedge Fund Manager should identify all required U.S. and international regulatory filings and clearly allocate responsibility for oversight of these filing obligations to appropriate personnel or service providers who will supervise and ensure timely compliance with applicable regulations and filing requirements.

3.  The investment activities of Hedge Funds involve many types of instruments (e.g., securities, bonds, or futures) across the global financial marketplace.  Accordingly, a Hedge Fund Manager must comply with many filing obligations. Appendix V – “U.S. Regulatory Filings by Hedge Fund Managers”, contains a list of certain U.S. federal reporting requirements and other regulations that may be applicable to a Hedge Fund Manager operating, trading and/or marketing in the United States. A Hedge Fund Manager should review similar types of filing requirements in other jurisdictions.

4.  A Hedge Fund Manager should review its Business Continuity/Disaster Recovery plan to ensure it is consistent with applicable laws, rules and regulations.
[See also Section C4 (2.b)]

4.  A Hedge Fund Manager should not expect market risk metrics, individually or collectively, to provide a complete view of market risk. For example, measures of risk-adjusted exposure may prove misleading in cases where market behavior differs substantially from past behavior, or when non-linear price effects from options are substantial.

Measures of portfolio volatility, such as standard deviation and VAR, seek to assess the risk of moderately infrequent market movements. A Hedge Fund Manager should not rely on these measures as dispositive indicators of portfolio performance in highly extreme events. In addition, these measures may fail (to a smaller or larger extent) even as guides to the impact of moderately infrequent events, because future market dynamics can differ from past dynamics. In light of this concern, a Hedge Fund Manager should periodically compare realized portfolio returns to standard deviation and VAR (or other measures of portfolio volatility).

Stress tests may fail to provide advance warning of a potential large loss if they do not adequately probe weaknesses in a Hedge Fund’s present portfolio or if markets move in an unforeseen manner. In this regard, a Hedge Fund Manager should periodically update stress tests in light of recent developments in the structure of a Hedge Fund’s portfolio and/or in the dynamics of financial markets.