Allowing employees to invest in a hedge fund manager’s funds can have both direct and indirect benefits for the manager and the employees, including aligning the interests of the employees with those of the manager and fund investors.  However, because most hedge funds elect not to register as investment companies pursuant to the Investment Company Act of 1940 (Company Act), they typically must comply with the requirements of the exclusions from investment company registration found in Section 3(c)(1) (which basically prohibits more than 100 beneficial owners in the fund) and Section 3(c)(7) (which limits investors in the fund to “qualified purchasers”) of the Company Act.  These exclusions can restrict employee investments in the manager’s funds.  However, Rule 3c-5 under the Company Act permits “knowledgeable employees” of a fund and certain of its affiliates to acquire securities issued by the fund without being counted towards the 100-beneficial owner threshold for Section 3(c)(1) funds and without having to qualify as qualified purchasers with respect to Section 3(c)(7) funds.  Investment and business personnel – portfolio managers, directors, officers and other senior business employees – typically fall squarely within the definition of knowledgeable employee, and in any case are often qualified purchasers as well.  However, a recurring question at hedge fund managers – particularly in the so-called “back office” – is whether the general counsel (GC) and chief compliance officer (CCO) of the manager constitute knowledgeable employees of the manager.  This question arises for at least three reasons.  First, GCs and CCOs – at least those who believe in what they are doing and where they are doing it – often want to invest in the funds of their manager-employers.  Second, investments by GCs and CCOs are good for the manager – they align employee incentives and fund investment goals.  (Some argue that fund investments by the GC and CCO can result in lax compliance, for example, that a GC or CCO invested in the fund would be more inclined to permit insider trading to increase fund returns.  We do not find that argument credible.  Smart GCs and CCOs know that lax compliance diminishes long-term returns.)  Third, many GCs and CCOs are close to being qualified purchasers, but are not quite there.  Such GCs and CCOs would not be able to invest in 3(c)(7) funds unless they fit within the knowledgeable employee definition.  In short, hedge fund investments by GCs and CCOs are usually a win-win.  But do the federal securities laws and rules permit such investments?  That is the fundamental question that this article seeks to answer.  More specifically, this article discusses: the benefits to a hedge fund manager of employee investments in manager funds; the interaction between Sections 3(c)(1) and 3(c)(7) of the Company Act and the knowledgeable employee definition; the operation of Rule 3c-5 of the Company Act and who generally qualifies as a knowledgeable employee; categories of hedge fund manager employees that are typically considered knowledgeable employees; consequences of making an incorrect knowledgeable employee determination; whether in-house counsel and compliance staff constitute knowledgeable employees; whether “dual-hatted” GCs/CCOs constitute knowledgeable employees; factors bearing on the analysis; and how the size of the firm impacts the knowledgeable employee calculus.