For many years hedge funds were not required to tell anyone anything about how they invested money. In 2011, the rules changed to require that hedge fund managers disclose at least some information to the Securities and Exchange Commission. This gives regulators a chance to spot warning signs of financial meltdown, but it doesn't help investors much.
Funds with $1.5 billion in assets have the biggest burden, but even they don't have to tell the SEC exactly what they've invested in. Instead, a big fund must report aggregate holdings in different types of assets, the geographic distribution of their investments, how much they rely on borrowed money and the monthly value of portfolio turnover. The fund manager -- a "hedge fund adviser" -- has two months after the end of a quarter to file a quarterly report with the SEC.
The smaller the fund, the less information the adviser must give up. At the $500 million level, the adviser must report fund exposures, the portfolio's liquidity and unencumbered cash, and the level of risk. A fund with less than $150 million in assets doesn't have to provide any detailed information. A fund at this level reports annually rather than quarterly, and has four months instead of two to submit its forms to the SEC. A hedge fund with less than $100 million in assets must register with the government of the state in which it is domiciled instead of reporting to the feds.
If you're hoping all this disclosure will help you pick the best hedge fund, guess again. Most of the details about hedge fund holdings are off the record as far as the public is concerned. The rules do provide for limited disclosure on a few topics: the fund's size, its largest investors and the auditors, brokers and marketers that work with the fund. An adviser can conceal even that much by identifying the hedge fund in her files by an alphanumeric code instead of by name, so the SEC filing is effectively anonymous.
The new rules subject hedge fund advisers to the federal Advisers Act, which requires them to adopt a code of ethics, keep accurate records and avoid false and misleading advertising. Norm Champ, the deputy director of the SEC's inspection and examination department, recommended in a 2012 speech that advisers comply with the act by giving fund clients full information about fees, expenses and conflicts of interest, and that they practice similar disclosures in their advertising.