The simultaneous management of hedge funds and alternative mutual funds (or liquid alternative funds) is rife with potential conflicts and the corresponding risk that the manager or hedge fund investors can benefit at the expense of the mutual fund investors, despite the manager’s fiduciary duty to manage each fund in the best interests of that fund’s investors as well as requirements under the Investment Company Act of 1940 that joint enterprises involving a mutual fund and certain affiliates 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).  In addition to the 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), operational and other conflicts arise out of such simultaneous management.  This article, the second in a three-part series, discusses conflicts arising out of simultaneous management of a hedge fund and alternative mutual fund, including operational conflicts, conflicts of fee-related investment decisions, cross trades, soft dollar allocations, valuation concerns, reporting conflicts and marketing conflicts.  The first article provided an overall assessment of conflicts of interest in simultaneous management; outlined the conflicts inherent in allocation of investments between a hedge fund and an alternative mutual fund following the same strategy; and discussed leverage limits, liquidity issues and diversification requirements applicable to alternative mutual funds.  The third article will address ways to mitigate identified conflicts of interest.