Do You Meet Hedge Fund Investing Qualifications?

Hedge funds aren’t for everyone. If you don’t meet the SEC’s definition of an accredited investor, you can’t invest in a hedge fund. And some hedge funds go beyond the SEC requirements, making sure that all investors are qualified purchasers.

What is an accredited investor?

An accredited investor is an individual who can enter into a hedge fund due to his or her financial standing. An investor is considered accredited if he or she meets any of the following criteria:

  • Has a net worth of more than $1 million, owned alone or jointly with a spouse

  • Has earned $200,000 in each of the past two years

  • Has earned $300,000 in each of the past two years when combined with a spouse

  • Has a reasonable expectation of making the same amount in the future

For investment institutions, such as pensions, endowments, and trusts, the primary qualification is having $5 million in assets.

What is a qualified purchaser?

Many hedge funds set a more stringent standard than the SEC, asking that investors be qualified purchasers under their own internal guidelines. Typically, qualified purchasers are individuals with at least $5 million in investable assets. Trusts, endowments, and pensions must have at least $25 million in investable assets. Investors who meet a firm’s qualified-purchaser standards are sometimes called super accredited.

Some firms may not set a qualified-purchaser standard, but they set their minimum-investment standards for their limited partners high enough that they may as well have a rule in place. For example, a hedge fund may demand that its new investors put in at least $1 million or $5 million, which eliminates a novice investor who has most of her wealth in her house and her IRA account.