Managers that simultaneously manage hedge funds and alternative mutual funds (or liquid alternative funds) have a fiduciary duty to manage each fund in the best interests of that fund’s investors.  In addition, Section 17(d) and Rule 17d-1 under the Investment Company Act of 1940 (the ’40 Act) require joint enterprises involving a mutual fund and certain affiliates to be fair to the mutual fund.  See “SEC and FSA Impose Heavy Fines on Investment Manager for Failing to Address Conflicts of Interest Associated with Side by Side Management of a Registered Fund and a Hedge Fund,” Hedge Fund Law Report, Vol. 5, No. 21 (May 24, 2012).  However, simultaneous management is rife with potential conflicts, such as an incentive for the manager to allocate trades to the hedge fund over the mutual fund in certain circumstances (including in order to earn higher fees in the hedge fund), thereby benefiting the manager and hedge fund investors to the detriment of the mutual fund investors.  This article, the first in a three-part series, provides an overall assessment of conflicts of interest in simultaneous management; outlines the conflicts inherent in allocation of investments between a hedge fund and an alternative mutual fund following the same strategy; and discusses leverage limits, liquidity issues and diversification requirements applicable to alternative mutual funds.  The second article in this series will discuss other conflicts arising out of simultaneous management of a hedge fund and alternative mutual fund, including cross transactions, soft dollar allocations, valuations, reporting, operational conflicts and marketing conflicts.  The third article will address ways to mitigate such conflicts of interest.  See also “Eight Important Regulatory and Operational Differences Between Managing Hedge Funds and Alternative Mutual Funds,” Hedge Fund Law Report, Vol. 7, No. 44 (Nov. 20, 2014).