Hedge funds within the US are subject to regulatory, reporting and record keeping requirements.[132] Many hedge funds also fall under the jurisdiction of the Commodity Futures Trading Commission and are subject to rules and provisions of the 1922 Commodity Exchange Act which prohibits fraud and manipulation.[133] The Securities Act of 1933 required companies to file a registration statement with the SEC to comply with its private placement rules before offering their securities to the public.[134] The Securities Exchange Act of 1934 required a fund with more than 499 investors to register with the SEC. The Investment Advisers Act of 1940 contained anti-fraud provisions that regulated hedge fund managers and advisers, created limits for the number and types of investors, and prohibited public offerings. The Act also exempted hedge funds from mandatory registration with the US Securities and Exchange Commission (SEC) when selling to accredited investors with a minimum of US$5 million in investment assets. Companies and institutional investors with at least US$25 million in investment assets also qualified.[140]
In December 2004, the SEC began requiring hedge fund advisers, managing more than US$25 million and with more than 14 investors, to register with the SEC under the Investment Advisers Act.[141] The SEC stated that it was adopting a "risk-based approach" to monitoring hedge funds as part of its evolving regulatory regimen for the burgeoning industry.[142] The new rule was controversial, with two commissioners dissenting,[143] and was later challenged in court by a hedge fund manager. In June 2006, the U.S. Court of Appeals for the District of Columbia overturned the rule and sent it back to the agency to be reviewed.[144] In response to the court decision, in 2007 the SEC adopted Rule 206(4)-8, which unlike the earlier challenged rule, "does not impose additional filing, reporting or disclosure obligations" but does potentially increase "the risk of enforcement action" for negligent or fraudulent activity.[145] Hedge fund managers with at least US$100 million in assets under management are required to file publicly quarterly reports disclosing ownership of registered equity securities and are subject to public disclosure if they own more than 5% of the class of any registered equity security. Registered advisers must report their business practices and disciplinary history to the SEC and to their investors. They are required to have written compliance policies, a chief compliance officer and their records and practices may be examined by the SEC.
The U.S.'s Dodd-Frank Wall Street Reform Act was passed in July 2010 and requires SEC registration of advisers who represented funds with more than US$150 million in assets, and funds with more than 15 US clients, and investors managing US$25 million. Registered managers must file information regarding their assets under management and trading positions. Previously, advisers with fewer than 15 clients were exempt, although many hedge fund advisers voluntarily registered with the SEC to satisfy institutional investors. Under Dodd-Frank, hedge fund managers with less than US$100 million in assets under management became subject to state regulation. This increased the number of hedge funds under state supervision. Overseas funds with more than 15 US clients and investors who managed more than US$25 million were also required to register with the SEC. The Act requires hedge funds to provide information about their trades and portfolios to regulators including the newly created Financial Stability Oversight Council. Under the "Volcker Rule," regulators are also required to implement regulations for banks, their affiliates, and holding companies to limit their relationships with hedge funds and to prohibit these organizations from proprietary trading, and to limit their investment in, and sponsorship of, hedge funds.
Hedge funds posted disappointing returns in 2008, but the average hedge fund return of -18.65% (the HFRI Fund Weighted Composite Index return) was far better than the returns generated by most assets other than cash or cash equivalents. The S&P 500 total return was -37.00% in 2008, and that was one of the best performing equity indices in the world. Several equity markets lost more than half their value. Most foreign and domestic corporate debt indices also suffered in 2008, posting losses significantly worse than the average hedge fund. Mutual funds also performed much worse than hedge funds in 2008. According to Lipper, the average US domestic equity mutual fund decreased 37.6% in 2008. The average international equity mutual fund declined 45.8%. The average sector mutual fund dropped 39.7%.
