What Are Net Worth Requirements for a Hedge Fund?

What Are Net Worth Requirements for a Hedge Fund?
••• Hemera Technologies/AbleStock.com/Getty Images

In 2011, the net-worth requirements for hedge-fund investors became more stringent in light of a wave of new financial regulation that emerged following the near-collapse of the financial markets. The hedge-fund industry shed substantial ground in 2008 during the market turmoil as investment performance faltered and investors withdrew money. In the U.S., the Securities and Exchange Commission responded with new laws that lift the investment minimums for investors. The changes are actually directed at hedge-fund firms.


In 2011, the U.S. Securities and Exchange Commission's dramatic changes to the framework of the hedge-fund industry began taking shape. The regulatory body increased the criteria for individuals and institutions who invest in the hedge-fund industry. Only certain qualified investors are eligible to invest in hedge funds, and the SEC raised the net-worth standard. The rule is framed so that hedge-fund managers can only charge certain fees to clients who meet the net-worth requirements. The new standards reflect the SEC's attempt to keep investment standards commensurate with inflation, according to a May 2011 article on the Forbes website.

New Minimum

Wealthy individuals must have a net worth of at least $2 million to meet the criteria for hedge-fund investing, according to Forbes. The previous minimum was $1.5 million. Prior to the upgrade to the rules, an investor's main home could count towards the value of his net worth. The new rules decide such assets are no longer allowed to be included. Fund managers must make sure that investors meet the minimum net-worth requirement, according to the Montgomery McCracken website.


Money-management firms must oversee at least $1 million in assets under management to qualify for hedge-fund investing. This is up from a previous standard of $750,000 in assets, according to Forbes. Wealthy individuals are not the only ones who lost money in hedge funds during the financial crisis. Certain feeder funds, which are investment funds that direct capital into into hedge funds, became exposed to investment fraud and severe market losses.


On average, hedge funds charge investors a 2 percent management fee and a 20 percent performance fee. These fees are at the center of the revised investment criteria. Some firms, including $19 billion hedge fund DE Shaw, have an even higher fee structure. The firm lowered its performance fee from 30 percent to 25 percent in response to a changing investor environment, according to a 2011 article in The New York Times. Hedge-fund performance fees were also trending lower throughout the industry in 2011.