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must also register as a commodity pool (see Chapter 8). Nevertheless, as
long as a fund invests significantly in cash instruments (that is, not com-
modities or futures), it is generally described as a hedge fund, not a com-
modity pool. A fund is called a commodity pool if substantially all its
holdings are in commodities, futures, and options on futures.
Unfortunately, hedge funds and commodity pools are similar in other
ways. These similarities make it difficult to draw a distinction between
hedge funds and commodity pools.
Legal Structures
Commodity pools are structured using the same types of businesses used to
create hedge funds. Pools organized in the United States are structured as
limited partnerships or limited liability corporations. Pools organized off-
shore are generally located in tax-favored locations and are structured as
corporations.
Commodity pools use the same exemptions from registration that are
used by hedge funds to avoid registration. Commodity pools can be sold to
individuals who pass certain income and wealth tests (see Chapter 8). The
tests are similar to income and wealth tests used by hedge funds to qualify
for exemptions from regulation.
Liquidity and Commodity Pools
Typically, a commodity pool restricts entry to and exit from the pool to
month-end or quarter-end. Commodity pools have somewhat simpler tax
reporting than hedge funds but don't allow daily entry or exit in order to
simplify tax computations.
Some commodity pools may impose a lockup on funds invested. The
commodity pool has less need to lock up investment funds because the
pool's assets are generally liquid and reasonably easy to liquidate. How-
ever, a commodity pool will impose a lockup if investors will tolerate a
lockup to try to hold on to investment funds longer.
SIZE AND GROWTH OF HEDGE FUNDS
Because hedge funds avoid most of the registration requirements of tradi-
tional money managers, no business or governmental agency has precise
knowledge of the number of hedge funds in existence. Businesses that col-
lect performance data on large numbers of hedge funds maintain estimates
of the number of hedge funds. Fortunately, the estimates are fairly close.
Introduction
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