For more than five years, the SEC has been conducting an on-and-off investigation of potential securities law violations by hedge fund management firm Pequot Capital Management.  The investigation relates to trades that took place nearly eight years ago, and according to people with knowledge of the case, the SEC has recently re-opened its investigation.  Regardless of the ultimate outcome of the SEC’s investigation, the time, expense and distraction involved in the Pequot investigation – or any investigation – can siphon scarce resources away from revenue-generating activities, cause reputational harm, undermine fundraising efforts and otherwise interrupt the management of a hedge fund firm.  The Pequot investigation therefore raises the questions: how can hedge fund managers avoid an SEC investigation?  And, if the SEC initiates an investigation, what is the best way to respond?  We answer these two questions in detail, and conclude with a “to do” list for hedge fund managers seeking to minimize the likelihood of an SEC investigation, or to minimize the gravity and disruption of an investigation once initiated.