Qualified Client ("QC")

What is a Qualified Client and why does it matter?

Quick Definition

A qualified client - not to be confused with "qualified purchaser" or "accredited investor" - is an investor that meets certain thresholds under the Investment Adviser's Act, and generally refers to investors who have investable assets of at least $2.2 million, not including the value of their primary residence, if any. Most, though not all, fund managers, depending on their registration status and/or place of business, are required to restrict their fund(s) to qualified clients.

Qualified Client Definition

A Qualified Client (QC) is an investor who meets specific financial thresholds established by the Securities and Exchange Commission (SEC) under the Investment Advisers Act. This designation allows investment advisers to charge performance-based fees to these clients, subject to certain conditions.

Qualified Client status is crucial for hedge fund managers and other investment professionals structuring fee arrangements, particularly those utilizing performance-based compensation models. Understanding the nuances of this designation is essential for both fund managers and sophisticated investors navigating the private investment landscape.

Net Worth Test

One way to achieve Qualified Client status is through the Net Worth Test. As of 2021, an investor must have a net worth of at least $2.2 million, excluding the value of their primary residence, immediately prior to entering into an investment advisory contract.

This threshold is designed to ensure that investors have sufficient financial resources to bear the risks associated with performance-based fee structures. Fund managers must implement robust verification procedures to confirm that investors meet this criterion before charging performance fees.

Assets Under Management Test

Alternatively, an investor can qualify as a Qualified Client through the Assets Under Management (AUM) Test. This requires the investor to have at least $1.1 million in assets under management with the adviser immediately after entering into the investment advisory contract.

This test allows for a more dynamic assessment of an investor’s financial sophistication, as it considers the assets actively managed by the adviser rather than just the investor’s overall net worth.

2021 SEC Change to Qualified Client

In June 2021, the SEC issued an order adjusting the Qualified Client thresholds. Effective August 16, 2021, the Net Worth Test increased from $2.1 million to $2.2 million, and the AUM Test rose from $1 million to $1.1 million.

These adjustments reflect the SEC’s mandate to review and adjust these thresholds for inflation every five years. Fund managers must stay abreast of these changes to ensure ongoing compliance with Qualified Client requirements.


To be considered a Qualified Client, an individual or entity must meet at least one of the following criteria:

  1. Net Worth Test: $2.2 million net worth (excluding primary residence)
  2. AUM Test: $1.1 million in assets under management with the adviser
  3. “Insider” Status: Officer, director, or employee of the fund manager involved in investment activities for at least 12 months
  4. Qualified Purchaser Status: Automatically qualifies as a Qualified Client

Fund managers must carefully verify and document that investors meet these requirements before charging performance-based fees.


The Qualified Client designation has significant implications for fund structuring and fee arrangements. Investment advisers may only charge performance-based fees to Qualified Clients, which impacts strategies for both 3(c)(1) and 3(c)(7) funds.

For 3(c)(1) funds, managers must ensure that all investors meet Qualified Client standards if they intend to charge performance fees. This requirement can limit the potential investor base and influence fund marketing strategies.

3(c)(7) funds, which are limited to Qualified Purchasers, automatically satisfy Qualified Client requirements due to the higher financial thresholds for Qualified Purchasers.

Qualified Client vs Accredited Investor

While often confused, Qualified Client and Accredited Investor are distinct designations with different implications:

  1. Financial Thresholds: Qualified Clients have higher net worth/income requirements
  2. Performance Fees: Only Qualified Clients can be charged performance-based fees
  3. Regulatory Framework: Qualified Client status is defined under the Investment Advisers Act, while Accredited Investor falls under the Securities Act

Fund managers must carefully distinguish between these designations when structuring offerings and determining eligible investors.

Qualified Client vs Qualified Purchaser

Qualified Client and Qualified Purchaser are related but distinct investor classifications:

  1. Financial Requirements: Qualified Purchasers face significantly higher thresholds ($5 million in investments for individuals)
  2. Fund Structures: Qualified Purchaser status is crucial for 3(c)(7) funds, while Qualified Client impacts performance fee eligibility
  3. Regulatory Implications: All Qualified Purchasers are automatically Qualified Clients, but not vice versa

Understanding these distinctions is critical for fund managers navigating different exemptions and structuring their offerings.

Qualified Clients and Launching a Hedge Fund

When launching a hedge fund, managers must carefully consider Qualified Client requirements, particularly if planning to charge performance fees. Key steps include:

  1. Implement robust investor verification procedures
  2. Clearly communicate Qualified Client criteria in offering documents
  3. Regularly review and update investor status to ensure ongoing compliance

Once these foundational elements are in place, fund managers can focus on optimizing their operational infrastructure. Repool’s hedge fund administration platform offers comprehensive support for emerging managers, streamlining compliance processes and investor reporting. By leveraging Repool’s expertise, fund managers can ensure they’re meeting Qualified Client requirements while focusing on their core investment activities.

Understanding and correctly applying Qualified Client standards is crucial for fund managers navigating the complex regulatory landscape of private investments. By mastering these concepts and partnering with experienced service providers, emerging managers can build a solid foundation for long-term success in the hedge fund industry.

Frequently Asked Questions

What is a qualified client under Rule 205-3?

Under Rule 205-3 of the Investment Advisers Act, a “qualified client” is an investor who meets specific financial thresholds, allowing investment advisers to charge performance-based fees. Qualified clients must meet either an assets-under-management test ($1.1 million under management with the adviser) or a net worth test ($2.2 million, excluding primary residence).

Who is a qualified purchaser in a hedge fund?

A qualified purchaser is an individual or married couple with $5 million or more in investments, excluding their primary residence or business property. This threshold is significantly higher than that for qualified clients and allows investors to participate in 3(c)(7) funds, which have fewer restrictions on the number of investors.

Can a 3(c)(1) fund be a qualified purchaser?

A 3(c)(1) fund itself cannot be a qualified purchaser. However, individual investors in a 3(c)(1) fund can be qualified purchasers. 3(c)(1) funds are typically limited to 100 accredited investors (or 250 if the fund size is less than $10 million), while 3(c)(7) funds are limited to qualified purchasers.

What is the difference between a qualified purchaser and a qualified client?

The main differences are:

  1. Financial Thresholds: Qualified purchasers must have $5 million in investments, while qualified clients need $2.2 million in net worth or $1.1 million under management.
  2. Regulatory Purpose: Qualified purchaser status determines eligibility for certain fund structures (e.g., 3(c)(7) funds), while qualified client status relates to an adviser’s ability to charge performance fees.
  3. Investment Opportunities: Qualified purchasers generally have access to a broader range of private fund investments.

What is the difference between QP (Qualified Purchaser) and AI (Accredited Investor)?

The key distinctions are:

  1. Financial Criteria: QP status is based on the value of investments ($5 million+), while AI status considers net worth, income, or professional credentials.
  2. Investment Access: QPs can invest in both 3(c)(1) and 3(c)(7) funds, while AIs are typically limited to 3(c)(1) funds.
  3. Regulatory Framework: QP status is defined under the Investment Company Act, while AI status falls under the Securities Act.

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