3C1 funds are privately traded funds that are exempt from SEC registration through the Investment Company Act of 1940.

Accredited Investors—Updated Investor Bulletin

3C1 refers to a portion of the Investment Company Act of 1940 that allows private investment companies to be considered exceptions to certain regulations and reporting requirements stipulated by the Securities and Exchange Commission (SEC). In other words, 3C1 allows private funds with 100 or fewer investors (and venture capital funds with fewer than 250 investors) and no plans for an initial public offering to sidestep SEC registration and other requirements, including ongoing disclosure and restrictions on derivatives trading. 3C1 refers to a portion of the Investment Company Act of 1940 that allows private investment companies to be considered exceptions to certain regulations and reporting requirements stipulated by the Securities and Exchange Commission (SEC). The result of 3C1 is that it allows hedge fund companies to avoid the SEC scrutiny that other investment funds, such as mutual funds, must adhere to under the Act. 3(c)(1) adds to the exceptions list in 3(c) citing certain parameters or requirements that, if satisfied, would allow private investment companies to not be classified as investment companies under the Act.

What Is 3C1?

The 3(c)(7) exemption refers to a segment of the Investment Company Act of 1940 that allows private funds to sidestep some SEC regulations. 3C7 is shorthand for the 3(c)(7) exemption.

The Laws That Govern the Securities Industry

Investment Company Registration and Regulation Package

Release No. IC-22597, International Series Release No. 1071, File No. S7-30-96

The 3(c)(7) exemption refers to a portion of the Investment Company Act of 1940 that allows private investment companies an exemption from some Securities and Exchange Commission (SEC) regulation, providing that they meet certain criteria. 3C7 is one of two exemptions in the Investment Company Act of 1940 that hedge funds, venture capital funds, and other private equity funds use to avoid SEC restrictions.
This frees up these funds to use tools like leverage and derivatives to an extent that most publicly traded funds cannot. That said, 3C7 funds must maintain their compliance to continue utilizing this exemption from the 1940 Act.﻿﻿ If a fund were to fall out of compliance by taking in investments from non-qualified purchasers, for example, it would open itself to SEC enforcement actions as well as litigation from its investors and any other parties it has contracts with.
Both 3C7 and 3C1 funds are exempted from the requirements imposed on “investment companies” under the Investment Company Act of 1940 (the “Act”). The exemption, found in section three of the act, reads in part:
> Section 3
> (3)(c) Notwithstanding subsection (a), none of the following persons is an investment company within the meaning of this title:
> (7)(A) Any issuer, the outstanding securities of which are owned exclusively by persons who, at the time of acquisition of such securities, are qualified purchasers, and which is not making and does not at that time propose to make a public offering of such securities.
To qualify for the 3C7 exemption, the private investment company must show that they have no plans of making an initial public offering (IPO) and that their investors are qualified purchasers. The vast majority of new hedge funds, private equity funds, venture capital funds, and other private investment vehicles are organized so as to fall outside the purview of the Investment Company Act of 1940.

3(c)(7) Exemption

A blind bid is an offer, commonly made by large portfolio managers, to buy a basket of securities without knowing the composition or cost of each.

Principal Blind Bidding In Portfolio Trading

How the Blind Offer is Hurting the Canadian Housing Market

Table of Contents
What Is a Blind Bid?
Understanding Blind Bids
Special Considerations The term blind bid refers to an offer made by investors to purchase a basket of securities without knowing which securities are included or their cost. A blind bid is an offer to purchase a bundle of securities where the investor has no knowledge of the exact securities being purchased. A blind bid is an offer to purchase a bundle of securities without knowing the exact securities being purchased. Individual investors look at factors like liquidity, volatility, and company news to determine a price to pay, whereas institutional investors make trades in the hundreds of millions of dollars and involve entire books of securities.

Blind Bid

Learn more about fund managers, who oversee a portfolio of mutual or hedge funds and make final decisions about how they are invested.

Table of Contents
What Is a Fund Manager?
Understanding Fund Managers
Responsibilities of Fund Managers
Active vs. Passive Managers
Notable Mutual Fund Managers Some other responsibilities of the fund manager include preparing reports on how well the fund is performing for clients, developing reports for potential clients to know the risks and objectives of the fund, and identifying clients and companies who may make good fits as clients. Investors should look for long-term, consistent fund performance with a fund manager whose tenure with the fund matches its performance time period. To qualify for a position in fund management—mutual funds, pension funds, trust funds, or hedge funds—individuals must have a high level of educational and professional credentials and appropriate investment managerial experience. This kind of fund manager is known as an active or alpha manager, while those who take a backseat approach are called passive fund managers.

Fund Manager

Also known as a multi-manager investment, a fund of funds (FOF) is a pooled fund that invests in other funds, usually hedge funds or mutual funds.

A fund of funds (FOF)—also known as a multi-manager investment—is a pooled investment fund that invests in other types of funds. Pros
Ultimate in diversification
Professional management expertise
Alleviation of risk and volatility
Exposure to assets usually beyond small investors
Additional layer of fees
Risk of overlap in holdings
Difficulty in finding qualified managers, funds
Though FOFs provide diversification and less exposure to market volatility, these returns may be lessened by investment fees that are typically higher than traditional investment funds. Small wonder that, after allocating the money invested to fees and other payable taxes, the returns of fund of funds investments may generally be lower compared to the profits that single-manager funds can provide—even if the funds perform very well. A fund of funds (FOF)—also known as a multi-manager investment—is a pooled investment fund that invests in other types of funds. In the past, funds of funds' prospectuses didn't always include the fees of the underlying funds.

Fund of Funds (FOF)

Learn more about the global macro strategy, a hedge fund strategy that bases holdings on macroeconomic principles.

A global macro strategy is a hedge fund or mutual fund strategy that bases its holdings primarily on the overall economic and political views of various countries or their macroeconomic principles. Fund types include discretionary global macro funds, commodity trading advisor global macro funds, and systemic global macro funds. Commodity trading advisor (CTA) global macro funds use various investment products, But rather than creating portfolios based on top-level views, these funds use price-based and trend-following algorithms to help construct portfolios and execute the fund's trades. Global macro funds generally use a combination of currency-based, interest rate-based, and stock index-based trading strategies. Stock or equity index trading under a global macro strategy analyzes the equity or commodity index of a specific country using futures, options, and exchange-traded funds (ETFs).

Global Macro Strategy

Gross exposure is the absolute level of a fund's investments, including the value of a fund's long and short positions.

Gross exposure refers to the absolute level of a fund's investments. Gross exposure measures an investment fund's total exposure to financial markets, including long and short positions and use of leverage. A fund has a net long exposure if the percentage amount invested in long positions exceeds the percentage amount invested in short position. Gross exposure is generally used as the basis for calculating a fund's management fees, since it takes into account total exposure of investment decisions on both the long and short side. If net exposure is the same as gross exposure, it means the fund only has long positions.

Gross Exposure

A hedge fund manager oversees and makes investment decisions for a hedge fund.

A hedge fund manager is firm or an individual who manages, makes investment decisions, and oversees the operations of a hedge fund. What sets hedge fund managers apart from other types of fund management is the fact that the personal worth and funds of hedge fund managers are usually tied directly to the fund itself. Hedge fund managers have the potential to be some of the highest-paid executives in the financial industry if they stay competitive and always come out as winners, however, some hedge fund managers do not make nearly as much as the top paid managers because if they fail at all in their financial endeavors, they will not be paid. 1:04
Hedge fund management firms are often owned by the managers in charge of the portfolio, meaning that they are entitled to a large amount of the profits that the hedge fund makes. A hedge fund manager is firm or an individual who manages, makes investment decisions, and oversees the operations of a hedge fund.

Hedge Fund Manager

An incentive fee is a fee charged by a fund manager based on a fund's performance over a given period and is usually compared to a benchmark.

An incentive fee is a fee charged by a fund manager based on a fund's performance over a given period. An incentive fee is a fee charged by a fund manager based on a fund's performance over a given period. In hedge funds, where incentive fees are more common, the fee is generally calculated based on growth of the fund's or account's net asset value (NAV). For instance, a fund manager may receive an incentive fee if their fund outperforms the S&P 500 Index over a calendar year, and may increase as the level of outperformance grows. An incentive fee, also known as a performance fee, is usually tied to a manager's compensation and their level of performance, more specifically, their level of financial return.

Incentive Fee

Instant history bias, also known as "backfill bias," is a phenomenon whereby poor reporting practices can inflate the performance of a hedge fund.

Instant history bias, also known as "backfill bias," is a phenomenon whereby inconsistent reporting practices can unduly inflate the apparent performance of a hedge fund. To help combat this perverse incentive, hedge fund databases have begun to limit the extent to which hedge fund managers can backfill their results—and some have prohibited backfilling altogether. Instant history is a closed related concept to survivorship bias, which further undermines the accuracy of hedge fund performance statistics. This is because the performance figures published in such databases were often submitted months or even years after they occurred, thereby giving the hedge fund manager the ability to delay or cancel publication unless their investment results are positive. Instant history bias is especially pervasive among hedge funds, because of the lightly regulated nature of the hedge fund industry.

Instant History Bias Defined

Liquid alternatives are a class of mutual funds that use alternative investing strategies similar to hedge funds but with daily liquidity.

Liquid alternative investments (or liquid alts) are mutual funds or exchange-traded funds (ETFs) that aim to provide investors with diversification and downside protection through exposure to alternative investment strategies. Liquid alternative investments (or liquid alts) are mutual funds or exchange-traded funds (ETFs) that aim to provide investors with diversification and downside protection through exposure to alternative investment strategies. While they follow many of the same market strategies, liquid alts are far more liquid than hedge funds - meaning that investors can readily buy and sell shares in the fund. Critics argue that the liquidity of so-called liquid alts will not hold up in more trying market conditions; most of the capital invested in liquid alts has entered the market during the post-financial crisis bull market. Citi has listed three different types of mutual fund structures that classify as liquid alternatives: single-manager funds, multi-alternatives, and commodities (or managed futures) funds.

Liquid Alternatives

A lock-up period is a window of time in which investors of a hedge fund or other closely-held investment vehicle are not allowed to redeem or sell shares. 

A lock-up period is a window of time when investors are not allowed to redeem or sell shares of a particular investment. Also, because each investor’s lock-up period varies by his personal investment date, massive liquidation cannot take place for any given fund at one time.
Lock-up periods can also be used to retain key employees, where stock awards are not redeemable for a certain period to keep an employee from moving to a competitor, maintain continuity, or until they have completed a key mission. For hedge funds, the lock-up period is intended to give the hedge fund manager time to exit investments that may be illiquid or otherwise unbalance their portfolio of investments too rapidly. Hedge fund lock-ups are typically 30-90 days, giving the hedge fund manager time to exit investments without driving prices against their overall portfolio. During the lock-up period, a hedge fund manager may invest in securities according to the fund’s goals without concern for share redemption.

What Is a Lock-Up Period?

A master-feeder structure is a device, commonly used by hedge funds, to pool capital raised by U.S. and non-U.S. investors. 

A master-feeder structure is a device commonly used by hedge funds to pool taxable and tax-exempt capital raised from investors in the United States and overseas into a master fund. For example, if feeder fund A's $100 contribution and feeder fund B's $200 contribution provided the total investments to a master fund, then fund A would receive one-third of the master fund returns while fund B would receive two-thirds of the returns. In a master-feeder structure, investment funds are formed from investor capital; these feeder funds, in turn, invest in a centralized master fund. The primary difference, of course, is that a feeder fund—by buying into the master fund—receives all of the master fund’s income attributes, including interest, gains, tax adjustments, and dividends. The average master-feeder structure involves one offshore master fund with one onshore feeder and one offshore feeder.

Master-Feeder Structure

A money manager is a person or financial firm that manages the securities portfolio of an individual or institutional investor. 

A money manager is a person or financial firm that manages the securities portfolio of an individual or institutional investor. In return for a fee, the money manager has the fiduciary duty to choose and manage investments prudently for clients, including developing an appropriate investment strategy and buying and selling securities to meet those goals. A money manager is a person or financial firm that manages the securities portfolio of individual or institutional investors. A money manager is a person or financial firm that manages the securities portfolio of an individual or institutional investor. A professional money manager does not receive commissions on transactions and is paid based on a percentage of assets under management.

Money Manager

The Montreal Carbon Pledge is an environmental initiative launched by the United Nations (UN) project, Principles for Responsible Investment (PRI).

The Montreal Carbon Pledge is an environmental initiative launched by the Principles for Responsible Investment (PRI) project under the United Nations (UN). Actions might include taking steps to lower the portfolio's carbon footprint, talking with the companies within the portfolio about their carbon footprints, and discussing findings and their implications with the portfolio's investors. A portfolio's overall carbon footprint is measured by summing the emissions of each company in the portfolio proportional to the amount of its stock that the portfolio contains. The Montreal Climate Pledge is a global initiative encouraging investment management firms to monitor and reduce the carbon emissions associated with their investment portfolios. Signatories are expected to provide their annual carbon footprint disclosure through their website, annual report, sustainability report, responsible investment report, or other publicly visible reporting channels.

Montreal Carbon Pledge

Offshore refers to a location outside of one's national boundaries, either land- or water-based. Learn about offshore banking, corporations, and investing.

Potential Advantages of Offshore Outsourcing in Business

International community continues making progress against offshore tax evasion

Offshore Investing: Types, Advantages and Legalities

Table of Contents
What Is Offshore?
Understanding Offshore
Special Considerations
Types of Offshoring
Advantages and Disadvantages
Offshore FAQs
The Bottom Line
Portfolio diversification
Favorable tax treatment
Asset protection
More scrutiny
Increased transparency from offshore jurisdictions
Risk of working with the wrong professional
Working offshore means that you have a job outside your home country. This requires opening a bank account, making deposits, withdrawals, and transfers from that account—the exact same way you would with a bank account at home.
Offshore trading involves opening and maintaining a brokerage or trading account with an offshore investment firm. Offshore banking involves securing assets in financial institutions in foreign countries, which may be limited by the laws of the customer’s home nation—much like offshore investing. The primary downsides to offshore investing are the high costs and the increased regulatory scrutiny worldwide that offshore jurisdictions and accounts face.

Offshore

Ranging in size from one-man firms to divisions of global investment banks, placement agents are intermediaries who raise investment funds capital.

A placement agent is an intermediary who raises capital for investment funds. Alternative sources of capital, such as sovereign funds, and ultra-high net worth individuals in many emerging markets and far-flung areas around the world highlight the productive role of placement agents.
The placement agent is compensated upon the successful placement of the fund with the investor(s) introduced by the agent. Most provisions within a placement agent agreement can be negotiated between the placement agent and the issuer, with compensation being the most commonly negotiated term. Placement agents are hired by investment funds (e.g., private equity fund, hedge fund, real estate fund, or other alternative assets) to raise capital quickly and efficiently, which they achieve by introducing the fund managers to qualified investors. Placement agents are especially helpful for marketing a fund in places where the fund manager has limited contacts as an introduction from a reputed placement agent enhances the credibility of the manager.

Placement Agent

Portfolio insurance refers to hedging a portfolio through short selling and it can also refer to brokerage insurance.

Portfolio insurance is the strategy of hedging a portfolio of stocks against market risk by short-selling stock index futures. Alternatively, portfolio insurance can also refer to brokerage insurance, such as that available from the Securities Investor Protection Corporation (SIPC).
Portfolio insurance is a hedging strategy used to limit portfolio losses when stocks decline in value without having to sell off stock. The SIPC oversees the liquidation of member broker-dealers that close when market conditions render a broker-dealer bankrupt or put them in serious financial trouble, and customer assets are missing.
In a liquidation under the Securities Investor Protection Act, SIPC and a court-appointed trustee work to return customers’ securities and cash as quickly as possible. Portfolio insurance is the strategy of hedging a portfolio of stocks against market risk by short-selling stock index futures. Whether through SIPC insurance or engaging in a market hedging strategy, most or all of the losses from a bad market swing can be avoided.

Portfolio Insurance

Portfolio pumping, also known as "painting the tape," is the practice of artificially inflating the performance of an investment portfolio.

Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds

Portfolio Pumping in Mutual Fund Families

Portfolio pumping, also known as "painting the tape," is the practice of artificially inflating the performance of an investment portfolio. If those shares are valued at $7 shortly prior to the investment fund's reporting period, an unscrupulous manager might inflate their value by placing a large volume of new orders for the stock at an inflated bid price, such as $14 per share. Public awareness of portfolio pumping has been increased by a series of influential academic articles, and the practice is now more tightly monitored by securities regulators. Portfolio pumping is the practice of artificially inflating portfolio performance. Portfolio pumping is harmful for investors because it provides an inaccurate impression of portfolio performance.

Portfolio Pumping Defined

Redemption involves the return of mutual fund shares or the return of money invested in a fixed-income security when it matures. 

Depending on the context, the term redemption has different uses in the finance and business world. So when a mutual fund investor requests a redemption, the fund management company will issue the investor a check for the shares at market value. If the same investor purchases a $1,000 par value corporate bond for $1,050 and the bond is redeemed for $1,000 at maturity, the $50 capital loss reduces the $100 capital gain for tax purposes. Investments in mutual funds are designed for individuals who buy and hold fund shares for the long term and selling fund shares after a short period of time results in higher costs to the investor. The redemption of fund shares from a mutual fund company must occur within seven days of receiving a request for redemption from the investor.

Redemption

A redemption suspension is a temporary measure whereby investors in a fund are unable to withdraw, or "redeem," the capital they invested in the fund.

GAM Fund Boards Suspend Dealing in Unconstrained/Absolute Return Bond Funds

GAM Says 'Significant' Conduct Concern Prompted Manager's Suspension

A redemption suspension is a temporary measure whereby investors in a fund are unable to withdraw, or "redeem," the capital they invested in the fund. Typically, hedge fund managers impose redemption suspensions when they are afraid that an unusually high volume of redemption requests may threaten the liquidity or solvency of the fund. For instance, the 2007–2008 financial crisis saw a spike in redemption suspensions by hedge funds, which is understandable insofar as that period did involve a rare and severe credit crunch that affected the liquidity of hedge funds and other investment vehicles. However, all funds are required to inform regulators and investors when a redemption suspension period has been imposed and to keep those parties informed of new developments for the duration of the suspension. Other events which could cause hedge funds to impose a redemption suspension include natural disasters and corporate actions, such as a proposed fund merger or reorganization.

Redemption Suspension Defined

A relative value fund uses an investment strategy to actively earn returns that exceed some relative benchmark, such as an index.

A relative value fund is an actively managed investment fund that seeks to exploit temporary differences in the prices of related securities. A common strategy when managing relative value funds is called pairs trading, which consists of initiating a long and short position for a pair of assets that are highly correlated. Such funds will use margin trading to take long positions on securities they consider undervalued, while at the same time taking short positions on related securities they consider overvalued. Whereas most investment funds evaluate investment candidates separately, relative value funds assess candidates by comparing their prices to those of related assets, or benchmarks. Pairs trading is a common strategy of relative value funds where a long and short position is initiated for a pair of assets that are highly correlated.

Relative Value Fund

Return of capital (ROC) is a payment, or return, received from an investment that is not considered a taxable event and is not taxed as income.

Return of capital occurs when an investor receives a portion of their original investment that is not considered income or capital gains from the investment. When an investor buys an investment and sells it for a gain, the taxpayer must report the capital gain on a personal tax return, and the sale price less the investment’s cost basis is the capital gain on the sale. Return of capital should not be confused with return _on_ capital, where the latter is the return earned on invested capital (and is taxable). Cost basis is defined as an investor’s total cost paid for an investment, and the cost basis for a stock is adjusted for stock dividends, stock splits, and the cost of commissions to purchase the stock. If an investor receives an amount that is less than or equal to the cost basis, the payment is a return of capital and not a capital gain.

Return of Capital

Two and Twenty is a typical fee structure that includes a management fee and a performance fee and is typically charged by hedge fund managers.

The Best-Paid Hedge Fund Managers Made $7.7 Billion in 2018

To the Shareholders of Berkshire Hathaway Inc

SENATOR BALDWIN AND REPRESENTATIVE PASCRELL REINTRODUCE TAX REFORM TO CLOSE TAX LOOPHOLE FOR MILLIONAIRES AND BILLIONAIRES ON WALL STREET

Two and twenty (or "2 and 20") is a fee arrangement that is standard in the hedge fund industry and is also common in venture capital and private equity. Total fund fees = $23M +$30M = $53M
**Year 2**:
Fund AUM at beginning of Year 2 = $1,150M
Fund AUM at end of Year 2 = $920M
Management fee = 2% of year-end AUM = $18.4M
Performance fee = Not payable as high watermark of $1,150M has not been exceeded
Total fund fees = $18.4M
**Year 3:**
Fund AUM at beginning of Year 3 = $920M
Fund AUM at end of Year 3 = $1,250M
Management fee = 2% of year-end AUM = $25M
Performance fee = 20% of fund growth above high watermark = **$100M** x 20% = **$20M**
Total fund fees = $25M +**$20M** = **$45M** While the 2% management fee charged by hedge fees is treated as ordinary income, the 20% fee is treated as capital gains because the returns are typically not paid out but are treated as if they were reinvested with the fund investors' monies. While the steep fees charged by star hedge fund managers may be justified by their sustained outperformance, the billion-dollar question is whether the majority of fund managers generate sufficient returns to justify their Two and Twenty fee model. A high watermark may be applicable to the performance fee; it specifies that the fund manager will only be paid a percentage of profits if the fund's net value exceeds its previous highest value.

Hedge Funds Investing

More in Investing

Terms in Hedge Funds Investing