What is an unregistered mutual fund?

By Investopedia Staff AAA
A:

An unregistered mutual fund is a general name given to investment companies that are not formally registered with the Securities and Exchange Commission (SEC). On some occasions, these companies are actually breaking the law by running unregistered investment portfolios. However, in most cases, the term unregistered mutual fund is interchangeable with hedge fund.

Although mutual funds and hedge funds generally perform the same functions (managing investment portfolios), mutual funds are registered with the SEC and hedge funds are not. Hedge funds are unregistered because of one of two exemptions in the Investment Company Act of 1940:

  1. Hedge funds need not register with the SEC if they have fewer than one hundred investors who are all considered accredited investors.
  2. A hedge fund is exempted from registration if all of the fund's investors (no matter the number) are considered qualified investors.

By meeting one of these two caveats, hedge funds are able to avoid registration, allowing them to take on riskier positions in derivatives and options, use short selling, hold larger positions and use leverage to magnify their returns (or losses).

Mutual funds, on the other hand, are bound by more restrictions than their unregistered cousins, making them a more accessible and suitable choice for the average investor. The difference between a registered and unregistered mutual fund is small when it comes to operations, but vastly different when it comes to the way their portfolios are managed. (To learn more, see our Mutual Funds Basics Tutorial and Taking A Look Behind Hedge Funds.)

RELATED FAQS

  1. What is the difference between a REIT and a real estate fund?

    A real estate fund invests in securities offered by public real estate properties directly or indirectly through Real Estate ...
  2. What is a volatility smile?

    Discover what options traders mean when they refer to a "volatility smile," and learn why a volatility smile's existence ...
  3. What is the difference between EBIT and operating income?

    Read about some of the subtle differences identified by the SEC between earnings before interest and taxes, or EBIT, and ...
  4. Under what circumstances is short selling advisable?

    Find out when short selling a stock is profitable and what an investor should keep in mind before deciding to pursue a short ...
RELATED TERMS
  1. Lilly Ledbetter Fair Pay Act

    A federal law designed to ensure equal pay for all workers, regardless ...
  2. Age Discrimination In Employment Act Of 1967

    A federal statute protecting "certain applicants and employees" ...
  3. Civil Rights Act of 1964

    Landmark federal legislation that prohibits discrimination on ...
  4. Occupational Safety And Health Act

    Law passed in 1970 to encourage safer workplace conditions in ...
  5. Administrative Order On Consent (AOC)

    An agreement between an individual or business and a regulatory ...
  6. Licensed For Reinsurance Only

    A license that allows a company to engage in services related ...

You May Also Like

Related Articles
  1. Stock Analysis

    Time to Look at PIMCO's Total Return ...

  2. Options & Futures

    Options -- Accessing Stakes In Apple ...

  3. Trading Strategies

    Risk Management Techniques For Shorting ...

  4. Options & Futures

    These Are The Top Brokerage Firms For ...

  5. Economics

    The Economic Impact of Better US-Cuba ...

Trading Center