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Introduction and Overview of 40 Act Liquid Alternative Funds
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What is a ’40 Act fund?
A ’40 Act fund is a pooled investment vehicle offered
by a registered investment company as defined in
the 1940 Investment Companies Act (commonly
referred to in the United States as the ’40 Act or, in
some instances, the Investment Company Act (ICA).
Such pooled investment vehicles fall into two broad
categorizations: open-end and closed-end. When
combined with the Securities Act of 1933 (the ’33
Act) and the Securities Exchange Act of 1934, the ’40
Act defines the way in which these types of pooled
investment vehicles can be packaged and sold to retail
and institutional investors in the public markets, and
places their governance under the responsibilities of
the Securities & Exchange Commission (SEC). The ’40
Act also contains a number of exemptions, including
one for privately offered funds such as hedge funds,
private equity funds, and real estate or infrastructure
investment funds. All ’40 Act funds are registered as
securities with the SEC and are therefore considered
to be publicly offered, a very different process than
the creation of a private co-mingled fund (typically a
limited partnership, or LP).
Both the 1933 and 1940 Acts were originally based
upon a philosophy of disclosure, and require that the
issuers of open-end or closed-end public funds fully
disclose all material information that an investor
would require in order to make the most informed
decision about an investment. Unless they qualify for
an exemption, securities offered or sold to the public
in the United States must be registered by filing a
registration statement with the SEC. The prospectus
for the investment is included as part of the
registration statement andmust describe the offering,
its management, details about the investments which
will be made across asset classes and details of the
key service providers for the security. This document
will explain the different types of funds being offered
and provide an overview of the key requirements.
What is an alternative ’40 Act fund?
There is no universal definition that describes what
makes a ’40 Act fund ‘alternative’, but the tag can be
applied broadly to any investment strategy that is
not purely pursuing long-only investing in equities or
debt instruments. The scope of alternatives therefore
includes traditional hedge fund strategies (equity
long/short, market neutral, global macro, event-
driven, fixed income, relative value, etc.) and also
includes investing in commodities and currencies.
It also extends to private equity and real estate
investment vehicles; however, for the purpose of this
primer we will cover mainly the liquid public market
strategies where investments can be bought and
sold on exchanges, either bilaterally or via broker-
dealers. An alternative ’40 Act fund is therefore a
fund structured to allow for the implementation of
an investment strategy that engages in techniques or
asset classes that differentiate them from fully paid
for, long-security investments.
Section I: Introduction and Overview of 40 Act Liquid
Alternative Funds
This document is an introduction to ’40 Act funds for hedge fund managers exploring the
possibilities available within the publically offered funds market in the United States. The
document is not a comprehensive manual for the public funds market; instead, it is a primer for
the purpose of introducing the different fund products and some of their high-level requirements.
This document does not seek to provide any legal advice.
We do not intend to provide any
opinion in this document that could be considered legal advice by our team. We would advise all
firms looking at these products to engage with a qualified law firm or outside general counsel
to review the detailed implications of moving into the public markets and engaging with United
States regulators of those markets. For introductions and referrals to qualified lawyers who
have experience with these products, please contact us at prime.advisory@citi.com.