Preparing for Liability: How Hedge Fund Contingency Reserves Can Lead to Inequitable Investor Treatment (Part One of Two)

Hedge fund governing documents generally give the manager broad discretion to establish reserves for contingent liabilities and other items that may ultimately become fund obligations. However, depending on the hedge fund manager’s practice, establishing and releasing contingency reserves may result in inequitable treatment of investors redeeming, subscribing or simply remaining in the fund. In this two-part guest series, S. Brian Farmer and Alina A. Grinblat, partner and associate, respectively, at Hirschler Fleischer, address hedge fund contingency reserves. In this first article, they explain how the reserves operate in practice, highlighting the effect on shareholders in the fund and the unequal treatment that can result. The second article will analyze hedge fund manager motivations for establishing reserves and propose an alternative structure that may avoid investor inequality resulting from those reserves. For additional insight from Farmer, see our two-part series “‘Best Ideas’ Conference Presentations: Challenges Faced by Hedge Fund Managers Under Federal Securities Law”: Part One (Aug. 7, 2014); and Part Two (Aug. 21, 2014).

To read the full article

Continue reading your article with a HFLR subscription.