What is a Qualified Eligible Participant (QEP)?
A qualified eligible participant (QEP) is a person who is allowed to trade in investment funds as defined in Rule 4.7 of the Commodity Exchange Act.
How Does a Qualified Eligible Participant (QEP) Work?
In order to be a QEP, a person must own at least $2,000,000 of securities and other investments, have an open account with a futures commission merchant for at least six months, have at least $200,000 of initial margin and option premiums for commodity interest transactions and have a portfolio of those investments.
QEPs are similar to, but not the same as, accredited investors. That is, they are considered sophisticated investors who understand the nature and risks of commodities trading and hedge funds. Accordingly, when funds allow only QEPs to be investors, they are involving only people who more fully understand the nature and risks of the investment. This provides an exemption from certain regulations for the hedge fund.
Why Does a Qualified Eligible Participant (QEP) Matter?
The Commodity Exchange Act of 1936 requires hedge fund managers to register as commodity pool operators (CPO) if their funds trade any commodity futures, contracts, or options. CPOs must comply with the Act’s disclosure requirements as well as those of the Commodity Futures Trading Commission (CFTC). If a hedge fund limits its investors only to qualified eligible participants (QEPs), the hedge fund may be able to obtain an exemption from several regulations the Commodity Exchange Act would impose.