What is 'Qualified Eligible Participant (QEP)'

A qualified eligible participant, or QEP, is an individual who meets requirements to trade in sophisticated investment funds such as futures and hedge funds. Rule 4.7 of the Commodity Exchange Act defines a QEP.

BREAKING DOWN 'Qualified Eligible Participant (QEP)'

Qualified eligible participants (QEPs) must meet a set of conditions described by the Commodity Exchange Act. They must own at least $2 million in securities and other investments, as well as at least $200,000 in initial margin and option premiums for commodity interest transactions. Also, they must have had an open account with a futures commission merchant at any time during the preceding six months. Finally, they must have a combined portfolio of the investments specified in the above requirements.

QEPs are considered to be more knowledgeable than the typical investor regarding sophisticated investments. Hedge funds, for example, are understood to be riskier than mutual funds, pension funds, and other investment vehicles. They are liable to see significant losses but produce higher-than-average long-term returns when successful. Hedge fund managers go long on assets they predict will do well in the future, while shorting assets they anticipate will fall in price. 

By law, a plurality of hedge fund participants must be QEPs. Hedge funds that limit their investors only to QEPs may obtain an exemption from several Securities and Exchange Commission regulations. This exemption allows hedge fund managers more considerable latitude in their investment decisions, which opens the door for both more significant risks and rewards than other types of investments. Hedge funds are blamed by many for contributing to the 2007-2008 financial crisis by adding risky, leverage-based derivatives to the banking system. These investments created high returns when the market was good, but amplified the impact of the market's decline.

QEPs Compared to Accredited Investors and Commodity Pool Operators

Qualified eligible participants are similar to accredited investors in that they both must meet specific income and net worth requirements. The difference is that QEPs are assumed to have a sophisticated understanding of the complexities of trading risky assets such as futures and hedge funds.

Individuals who receive funds to use in a commodity pool such as a hedge fund are required to register as Commodity Pool Operators (CPO). CPOs must comply with the disclosure requirements of both the Commodity Exchange Act and the Commodity Futures Trading Commission. While investors in hedge funds must be QEPs, hedge fund managers must be both QEPs and CPOs.

  1. Short Hedge

    A short hedge is an investment strategy utilized to protect against ...
  2. Cross Hedge

    A cross hedge is used to manage risk by investing in two positively ...
  3. Commodity Pool

    A commodity pool is a private investment structure that combines ...
  4. Two and Twenty

    Two and twenty is a compensation structure that hedge fund managers ...
  5. Chinese Hedge

    A Chinese hedge is a position that looks to capitalize on mispriced ...
  6. Howard-D'Antonio Strategy

    Thee Howard Antonio Strategy offers investors an algorithm for ...
Related Articles
  1. Managing Wealth

    Is the Hedge Fund Over?

    After decades at the top of the investment food chain, hedge funds may be in decline.
  2. Investing

    How To Start a Hedge Fund In the United States

    A general overview of how to start a hedge fund firm in the United States, including complying with state and federal regulations.
  3. Managing Wealth

    HF Performance Report: Did Hedge Funds Earn Their Fee in 2015?

    Find out whether hedge funds, which have come under tremendous pressure to improve their performance, managed to earn their fee in 2015.
  4. Investing

    3 Things Divorcees With Hedge Fund Investments Should Know

    Hedge funds are assets that can be very difficult to divide during a divorce.
  5. Investing

    Are Hedge Funds Chasing Performance?

    Learn why hedge funds have performed worse than the S&P 500 Index in 2016, and why they may overweight equities to play catch-up in the second half of 2016.
  6. Investing

    Hedge Funds Since the Financial Crisis: Boom to Bust

    Once dominant, hedge funds have struggled since the crisis, although there are notable exceptions.
  7. Investing

    Why Hedge Fund Managers Make Good Advisory Clients

    Super-busy hedge fund managers should be viewed as an opportunity for sophisticated financial advisors who can step in and offer their services.
  8. Investing

    Evaluating Hedge Fund Performance

    Most are aware of hedge funds, but many don't know the dirty details of this investment type.
  9. Investing

    Hedge Funds Tutorial

    Hedge funds can be an integral part of a well-diversified portfolio - if you know how to choose them.
  1. Are there publicly traded hedge funds?

    See why a privately arranged hedge fund may decide to take its fund public, and how the investing public at large can gain ... Read Answer >>
  2. Licenses for hedge fund manager

    Obtain the pertinent information about the various types of licenses a hedge fund manager needs to have to legally operate ... Read Answer >>
Trading Center