Operational Risk for Funds of Hedge Funds – An Analysis of Regulatory Requirements Under Dodd-Frank Act

Abstract

As a result of the 2008 financial crisis, there was an overwhelming regulatory response both in the U.S. and worldwide designed to prevent the financial and regulatory shortcomings that led to the crisis. Among the many provisions passed into law, the new legislation imposes regulations on hedge funds pertaining to new registration and reporting requirements, risk rules, and investment limits. In this paper, we overview of the new regulatory requirements that were enacted based on the Dodd-Frank Act of 2010. The requirements apply to both hedge funds and fund of hedge funds operations. In particular, we will study the regulations which directly influence operational due diligence for both U.S.-based fund of hedge funds and non-U.S.-based fund of hedge funds interacting with U.S. markets.