Cay Compass – Hedge funds have distinct product and market characteristics that make them vulnerable to money laundering, fraud and even terrorist financing.
They are manager skill–based, which means there is a certain level of proprietary knowledge involved in the asset selection and trading strategy of the fund.
In addition, most funds are based in offshore tax jurisdictions and are not regulated, which means they are not obliged to disclose their holdings.
Meanwhile, the recent trend of retail hedge funds makes these products more accessible with lower minimum investments than what has historically been the case.
Because of these risks, hedge funds are increasingly attracting regulator attention, and may be subject to more rigorous regulation in the near future.
Hedge funds may be the most susceptible to money laundering of all unregistered investment companies (such as venture capital or private equity) because of the relative liquidity of their interests and their structures. Hedge funds allow investment and valuation on a monthly, quarterly or annual basis.
