The Conundrum of Hedge Fund Definition

33 Pages Posted: 1 Oct 2016 Last revised: 7 Apr 2017

See all articles by Hossein Nabilou

Hossein Nabilou

University of Amsterdam, Amsterdam Law School; The International Institute for the Unification of Private Law (UNIDROIT)

Date Written: April 6, 2017

Abstract

This Article attempts to define hedge funds and to distinguish them from a variety of similar investment funds. After reviewing the hedge fund definition in the U.S. and the EU, this Article argues that the current regulatory framework, which defines hedge funds by reference to what they are not rather than to what they are, is prone to regulatory arbitrage. Even in the presence of a statutory definition, due to the ineluctable indeterminacy of language and regulatory arbitrage problems, borderline issues will persist, which makes statutory definitions of hedge funds neither possible nor desirable. Therefore, regulators should avoid the temptation of proposing such statutory definitions. Instead, they should rely on regulatory discretion within a broad principles-based regulatory framework to do so.

For such a principles-based regulatory regime to work, regulators should rely on a functional definition of hedge funds. Accordingly, this Article defines hedge funds as privately organized investment vehicles with a specific fee structure, not widely available to the public, aimed at generating absolute returns irrespective of market movements (Alpha) through active trading and making use of a variety of trading strategies. This functional definition is likely to help address regulatory problems that might originate from statutory definitions of hedge funds.

Keywords: Hedge Fund, Statutory Definition, Functional Definition, Regulatory Arbitrage, Principles-Based Regulation

JEL Classification: F3, G1, G2, G3, K2, N2

Suggested Citation

Nabilou, Hossein, The Conundrum of Hedge Fund Definition (April 6, 2017). European Company and Financial Law Review, Vol. 14, No. 1, March 2017, Available at SSRN: https://ssrn.com/abstract=2846097

Hossein Nabilou (Contact Author)

University of Amsterdam, Amsterdam Law School ( email )

Postbus 15654
1001 ND
Amsterdam, Noord-Holland 1001 ND
Netherlands

HOME PAGE: http://www.uva.nl/profiel/n/a/h.nabilou/h.nabilou.html

The International Institute for the Unification of Private Law (UNIDROIT) ( email )

Via Panisperna 28
Rome, 00184
Italy

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
145
Abstract Views
1,008
Rank
362,717
PlumX Metrics