Qualified Eligible Participant (QEP)

Qualified Eligible Participant (QEP)

A qualified eligible participant (QEP) is an individual who meets the requirements to trade in sophisticated investment funds such as futures and hedge funds. A qualified eligible participant (QEP) is an individual who meets the requirements to trade in sophisticated investment funds such as futures and hedge funds. A qualified eligible participant is an individual who meets the requirements to trade in different investment funds, such as futures and hedge funds. QEPs are similar to, but not the same as, accredited investors in that they are assumed to have a sophisticated understanding of the complexities of trading risky assets such as futures and hedge funds. While investors in hedge funds must be QEPs, hedge fund managers must be both QEPs and CPOs.

A qualified eligible participant is an individual who meets the requirements to trade in different investment funds, such as futures and hedge funds.

What Is a Qualified Eligible Participant (QEP)?

A qualified eligible participant (QEP) is an individual who meets the requirements to trade in sophisticated investment funds such as futures and hedge funds. These requirements are defined by Rule 4.7 of the Commodity Exchange Act (CEA).

A qualified eligible participant is an individual who meets the requirements to trade in different investment funds, such as futures and hedge funds.
A QEP must own at least $2,000,000 of securities and other investments, have an open account with a FCM for at least six months, and have a portfolio that has at least $200,000 of initial margin and option premiums for commodity interest transactions.
QEPs are similar to, but not the same as, accredited investors in that they are assumed to have a sophisticated understanding of the complexities of trading risky assets such as futures and hedge funds.

Understanding Qualified Eligible Participants (QEPs)

Qualified eligible participants (QEPs) must meet a set of conditions described by the Commodity Exchange Act.

QEPs are considered to be more knowledgeable than the typical investor regarding sophisticated investments. Hedge funds, for example, are understood to be riskier than mutual funds, pension funds, and other investment vehicles. They are liable to see significant losses but produce higher-than-average long-term returns when successful. Hedge fund managers go long on assets they predict will do well in the future, while shorting assets they anticipate will fall in price. 

By law, a plurality of hedge fund participants must be QEPs. Hedge funds that limit their investors only to QEPs may obtain an exemption from several Securities and Exchange Commission (SEC) regulations. This exemption allows hedge fund managers more considerable latitude in their investment decisions, which opens the door for both more significant risks and rewards than other types of investments.

Hedge funds are blamed by many for contributing to the 2007-2008 Financial Crisis by adding risky, leverage-based derivatives to the banking system. These investments created high returns when the market was good, but amplified the impact of the market's decline.

QEPs vs. Accredited Investors and CPOs

Qualified eligible participants are similar to accredited investors in that they both must meet specific income and net worth requirements. The difference is that QEPs are assumed to have a sophisticated understanding of the complexities of trading risky assets such as futures and hedge funds.

Individuals who receive funds to use in a commodity pool such as a hedge fund are required to register as Commodity Pool Operators (CPO). CPOs must comply with the disclosure requirements of both the Commodity Exchange Act and the Commodity Futures Trading Commission. While investors in hedge funds must be QEPs, hedge fund managers must be both QEPs and CPOs.

Related terms:

Accredited Investor

An accredited investor has the financial sophistication and capacity to take the high-risk, high-reward path of investing in unregistered securities sans certain protections of the SEC. read more

Commodity Exchange Act (CEA)

The Commodity Exchange Act regulates commodities and futures trading in the U.S. It has been in force since 1936. read more

Commodity Futures Trading Commission (CFTC)

The CFTC is an independent U.S. federal agency established by the Commodity Futures Trading Commission Act of 1974. read more

Commodity Pool Operator (CPO)

Commodity pool operators (COPs) are salespeople for investment funds that trade in securities such as futures, options, swaps, and certain types of foreign exchange contracts. read more

Commodity Trading Advisor (CTA)

A CTA provides advice regarding the buying and selling of futures contracts, options on futures, or certain foreign exchange contracts. read more

Futures Commission Merchant (FCM)

A futures commission merchant (FCM) solicits or accepts orders to buy or sell futures contracts or options on futures for a payment from customers. read more

Fiduciary

A fiduciary is a person or organization that acts on behalf of a person or persons and is legally bound to act solely in their best interests. read more

Hedge Fund

A hedge fund is an actively managed investment pool whose managers may use risky or esoteric investment choices in search of outsized returns. read more

Managed Futures Account

A managed futures account is a type of alternative investment vehicle. It is similar to a mutual fund but it focuses on futures and other derivatives. read more

Mutual Fund

A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds, or other securities, which is overseen by a professional money manager. read more