For hedge funds that must register with the

Securities and Exchange Commission

, the deadline is at hand.

While the SEC's controversial rule mandates registration for most hedge funds by Feb. 1, Monday is effectively the last day to file an application. The deadline to submit a Form ADV has already been pushed back from mid-December, when funds were battling to hit their year-end performance goal.

Registration remains unpopular among hedge funds.

The requirement will impose a heavier burden of compliance for managers and will increase costs. That is not to say that hedge funds are completely unregulated today. For instance, all hedge funds -- registered advisers and others -- are subject to the SEC's Anti-Fraud Provisions of the Investment Advisers Act, which, for instance, penalizes false advertising and misrepresentation.

But the new rule will add more constraints.

For instance, firms have to hire a chief compliance officer. The cost of such an executive can be $500,000 a year, says Michael Goodman, founder of hedge fund recruiting firm Long Ridge Partners. It is not a big deal for large funds that already have a general counsel on board who will fit the role. But it definitely poses a challenge to smaller funds.

Managers will also have to put in place a precise manual describing their compliance policies and follow strict email retention and record-keeping rules.

As a result, hedge funds have looked for ways to avoid registration.

Some will use the exemption granted to funds that have a two-year lock-up period (investors are not allowed to redeem their shares within two years). This exemption strategy will be the route of choice, experts say, simply because it is the most practical.

But a two-year lock-up isn't available to all managers. For the most part, investors are willing to grant such free rein only to well-established traders whom they trust.

The SEC rule also provides exemption for managers with fewer than 15 clients. The loophole will be practically impossible to exploit because it redefined the meaning of client. Traditionally, "clients" meant the individual "funds" an adviser had under management. Now, the term denotes funds and investors, or more specifically the sum of both. For instance, a manager with two funds and a total of 50 investors will now have 52 "clients," under the new definition.

This particular clause is being challenged in court by Philip Goldstein, a hedge fund manager at Opportunity Partners who filed a lawsuit against the SEC. The Court of Appeals for the District of Columbia heard his case last month. Goldstein says he is hopeful to win. "I believe the court will find that the SEC has no principled justification for redefining 'client' to suit its real objective of regulating hedge funds."

Finally, the SEC grants exemption to managers with less than $30 million of assets under management. Some see that as another potential hazard.

Funds that are the most likely to commit fraud are precisely the small ones, says Nir Narden, a lawyer at law firm Greenberg Traurig. "You're looking at managers running 8 (million) to 10 million dollars with 80 different clients investing $100,000-$150,000 each. Those managers go after people who don't understand what it's all about," says Yarden.

Based on the institutionalized nature of the market, many find the rule unnecessary, because the industry has done a good job at protecting itself against fraud.

In a 1 trillion dollar market, the amount of fraud has remained limited, even with the occasional Bayou, Yarden says. "Over the past three years, there has been a flood of institutional assets, and those investors are much more sophisticated and have more resources to do their own due diligence," he adds.

A search on the SEC Web site shows that some of the top 10 largest hedge funds, such as Farallon Capital Management, Caxton Associates, D.E. Shaw or Bridgewater Associates, are already registered investment advisers. Most have registered because they serve a large institutional client base that requires it.