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 are unregistered securities or stocks?

    Before securities, like stocks, bonds and notes, can be offered for sale to the public, they first must be registered with ... Read Answer >>
  2. Can mutual funds invest in hedge funds?

    Learn about mutual fund portfolio management techniques and mutual funds' ability to invest in hedge funds, as well as new ... Read Answer >>
  3. What is the purpose of a hedge fund?

    Find out what a hedge fund is, how it is set up and why it is different than other forms of investment partnerships like ... Read Answer >>
  4. Do hedge funds invest in mutual funds?

    Learn whether hedge funds invest in mutual funds. They are permitted to invest in mutual funds but usually avoid doing so ... Read Answer >>
  5. What is the doctor advisory scam?

    U.S. securities law provides certain exemptions that allow privately owned companies to issue shares of unregistered stock ... Read Answer >>
  6. What does a hedge fund do?

    Read how hedge funds differ from other investment vehicles and how their investment strategies make them unique and potentially ... Read Answer >>
Related Articles
  1. Investing

    Hedge Funds' Higher Returns Come At A Price

    Learn how hedge funds win big gains for investors - and why they sometimes lose.
  2. Investing

    The Difference Between Mutual Funds And Hedge Funds

    Both mutual funds and hedge funds are managed portfolios. A manager chooses securities and then lumps them into a single portfolio.
  3. Investing

    What Are Hedge Funds?

    Hedge funds may be similar to mutual funds in some ways, but they differ in other ways like fee structure. Is a hedge fund for you?
  4. Investing

    Understanding a Hedge Fund Manager's Worth

    Hedge funds pool investors’ money much like mutual funds. However, they are not as closely regulated as mutual funds, and although their investments may include stocks, bonds and other traditional ...
  5. Investing

    Fund Of Funds - High Society For The Little Guy

    Like a mutual fund, FOFs provide instant diversity by grouping many hedge funds into one product.
  6. Investing

    Are Hedged Mutual Funds For You?

    Long the purview of institutional investors and ultra-wealthy individuals, financial services firms are making alternative investment strategies available to a wider audience of investors. Understanding ...
  7. Investing

    What Investment Is Best For You?

    ETFs, mutual funds, hedge funds and advisory firms are just some of the choices to consider.
  8. Financial Advisor

    Advising FAs: Explaining Mutual Funds to a Client

    More than 80 million people, or half of the households in America, invest in mutual funds. No matter what type of investor you are, there is bound to be a mutual fund that fits your style.
RELATED TERMS
  1. Legend

    A statement on a stock certificate noting restrictions on the ...
  2. Rule 144

    A Securities and Exchange Commission rule that sets the conditions ...
  3. Investment Fund

    A supply of capital belonging to numerous investors that is used ...
  4. Long/Short Fund

    A type of mutual fund that mimics some of the trading strategies ...
  5. Exchange-Traded Mutual Funds

    Investopedia explains the definition of exchange-traded mutual ...
  6. Pooled Funds

    Funds from many individual investors that are aggregated for ...
Hot Definitions
  1. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
  2. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
  3. Majority Shareholder

    A person or entity that owns more than 50% of a company's outstanding shares. The majority shareholder is often the founder ...
  4. Competitive Advantage

    An advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retain more customers ...
  5. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities ...
  6. Wash-Sale Rule

    An Internal Revenue Service (IRS) rule that prohibits a taxpayer from claiming a loss on the sale or trade of a security ...
Trading Center