This is the second article in our three-part series on opt-out rights in the hedge fund industry, and legal and operational challenges associated with structuring and implementing such rights.  This article addresses the structure and exercise of opt-out rights, as well as regulatory risks associated with offering such rights.  The first article explored eight reasons why investors may demand and managers may grant opt-out rights.  See “Investment Opt-Out Rights for Hedge Fund Investors: Rationales, Mechanics, Regulatory Risks and Operational Challenges (Part One of Three),” Hedge Fund Law Report, Vol. 6, No. 43 (Nov. 8, 2013).  And the third article will continue the discussion of risks associated with opt-out rights, focusing on regulatory and other risks, and conclude with a discussion of best practices for implementing such rights.  The intent of this series is to highlight the core tenets of a tool that managers can use to raise capital more effectively.  To offer a simple example: Rather than turning away a pension fund investor with an aversion to tobacco stocks, a manager can grant the pension fund the right to opt out of tobacco-related investments, and accept the investment.  But opt-out rights get significantly more complex, implicating concepts of transparency, liquidity, fiduciary duty and other legal and operational challenges.  This series identifies the headline challenges in this area and offers best practices for addressing them.