Institutionalization, Investment Adviser Regulation, and the Hedge Fund Problem

52 Pages Posted: 25 Aug 2011 Last revised: 23 Dec 2013

Date Written: August 23, 2011


This Article contends that more effective regulation of investment advisers could be achieved by recognizing that the growth of hedge funds, private equity funds, and other private funds in recent decades is a manifestation of institutionalization in the investment advisory context. That is, investment advisers today commonly advise these “institutions,” which have supplanted other, smaller investors as advisory clients. However, the federal securities statute governing investment advisers, the Investment Advisers Act of 1940, does not address the role of private funds as institutions that now intermediate those smaller investors’ relationships to investment advisers. Consistent with that failure, investment adviser regulation regards a private fund, rather than the fund’s investors, as both the “client” of the fund’s adviser and the “thing” to which the adviser owes its obligations. The regulatory stance that the fund is the client, which recent financial regulatory reform did not change, renders the Advisers Act incoherent in its application to investment advisers managing private funds and, more importantly, thwarts the objective behind the Advisers Act: investor protection. This Article shows that policymakers’ focus should be trained primarily on the intermediated investors – those who place their capital in private funds – rather than on the funds themselves and proposes a new approach to investment adviser regulation. In particular, investment advisers to private funds should owe their regulatory obligations not only to the funds they manage but also to the investors in those funds.

Keywords: Investment Advisers, Investment Advisers Act of 1940, Hedge Funds, Private Funds, Securities Regulation, Institutionalization

JEL Classification: G1, G2

Suggested Citation

Krug, Anita K., Institutionalization, Investment Adviser Regulation, and the Hedge Fund Problem (August 23, 2011). Hastings Law Journal, Vol. 63, No. 1, p. 1, 2011; University of Washington School of Law Research Paper No. 2011-22. Available at SSRN:

Anita K. Krug (Contact Author)

Chicago-Kent College of Law ( email )

565 W. Adams Street
Chicago, IL 60661
United States
3129065010 (Phone)

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