In the United States, individuals provide more money to hedge funds than does any other group. They were prominent among early hedge fund investors. They have always been an important group to understand for marketing, investment policy, tax reporting, and public policy. On first impression, one would think that the motives of individual investors should be easy to understand because they should have the same concerns about returns, risk, and taxes. In fact, investors' interests may differ markedly.

Individuals are likely to invest directly in single-manager hedge funds. Other types of investors are much more likely to invest in funds of hedge funds (see Chapter 2 for a description of funds of funds). Recently, however, individuals have begun placing much of their new money into funds of hedge funds.

High-Net-Worth Individuals
Most individuals who invest in hedge funds are affluent and are taxed at high marginal rates. High-net-worth individuals have a disproportionate portion of the investment assets simply because of their high net worth. Federal securities laws also severely restrict middle-income and low- income investors from investing in hedge funds (see Chapter 8), so high- net-worth individuals contribute most of the investment dollars from individuals.

Security regulations define a high-net-worth individual in a variety of ways. An individual who is an "accredited investor" has income of at least $200,000 or assets of $1 million (see Chapter 8 for greater detail about securities regulations related to accredited investors and other topics discussed in this chapter). Other regulations draw the line at $2 million for a "qualified eligible participant" (QEP). Finally, a "qualified purchaser" is an individual investor with a net worth exceeding $5 million.

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