The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

Articles By Topic

By Topic: Concurrent Management

  • From Vol. 8 No.14 (Apr. 9, 2015)

    Operational Conflicts Arising Out of Simultaneous Management of Hedge Funds and Alternative Mutual Funds Following the Same Strategy (Part Two of Three)

    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,” The 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.

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  • From Vol. 8 No.9 (Mar. 5, 2015)

    U.K. Financial Conduct Authority Sanctions Aviva Investments for Inadequate Internal Controls over Side-by-Side Management of Hedge Funds and Other Funds

    Side-by-side management of funds presents thorny compliance issues for managers due to the inherent conflicts of interest they present and the temptation to benefit one fund at the expense of another.  Both the SEC and the U.K. Financial Conduct Authority (FCA) are keenly attuned to such issues.  The FCA recently issued a Final Notice imposing a financial penalty of £17.6 million on asset manager Aviva Investors Global Services Limited arising out of conflicts of interest and internal control failures related to its side-by-side management of fixed income hedge funds and long-only funds.  This article summarizes the firm’s internal controls failings, its specific violations of FCA regulations and the FCA’s calculation of the penalty it imposed.  For a recent example of an SEC enforcement action involving improper trade allocations, see “Hedge Fund Adviser Structured Portfolio Management Settles SEC Charges Relating to Improper Trade Allocations and Investor Disclosures,” The Hedge Fund Law Report, Vol. 7, No. 36 (Sep. 25, 2014).  Cherry picking may even lead to federal criminal securities fraud charges.  See “How Can Hedge Fund Managers Avoid Criminal Securities Fraud Charges When Allocating Trades Among Multiple Funds and Accounts?,” The Hedge Fund Law Report, Vol. 4, No. 19 (Jun. 8, 2011).

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  • From Vol. 7 No.45 (Dec. 4, 2014)

    Regulators from the SEC, CFTC and New York Attorney General’s Office Reveal Top Hedge Fund Enforcement Priorities (Part One of Four)

    This is the first article in a four-part series covering this year’s edition of Practising Law Institute’s annual hedge fund enforcement event.  Participants at the event included regulators from the SEC, CFTC and New York Attorney General’s Office, who provided candid and detailed insight into their hedge fund enforcement priorities, principles, goals and experience.  This first article discusses the key points made by Julie M. Riewe, Co-Chief of the SEC’s Asset Management Unit, with respect to enforcement trends, principal transactions, conflicts raised by side-by-side management, valuation, allocation of expenses and the potential deterrent value of smaller enforcement actions.  The second article in this series will address CFTC enforcement concerns and cases, New York Attorney General’s Office initiatives and defense strategies for avoiding and managing government investigations.  The third article in the series will focus on SEC inspections and examinations.  And the final article will provide instruction (based on points made at the PLI event) on how to establish an effective private fund compliance program.  See also “Top SEC Officials Discuss Hedge Fund Compliance, Examination and Enforcement Priorities at 2014 Compliance Outreach Program National Seminar (Part Three of Three),” The Hedge Fund Law Report, Vol. 7, No. 9 (Mar. 7, 2014); “OCIE Director Andrew Bowden Identifies the Top Three Deficiencies Found in Hedge Fund Manager Presence Exams and Outlines OCIE’s Examination Priorities,” The Hedge Fund Law Report, Vol. 7, No. 38 (Oct. 10, 2014).

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  • From Vol. 3 No.38 (Oct. 1, 2010)

    Fifth Street No-Action Letter Outlines Factors the SEC May Consider in Approving Joint Participation in a Restructuring by Registered and Private Funds Managed by the Same Manager

    In February of this year, the SEC issued a no-action letter to Fifth Street Finance Corp. (Fifth Street), a registered investment company (RIC) that sought to participate jointly in a restructuring transaction with a private fund managed by the same management company.  While the letter is explicitly limited to its unique facts, it nonetheless provides insight into the factors the SEC may consider when determining whether a RIC is getting a worse deal than a private fund where both funds are under common control and participate jointly in the same transaction.  The letter is relevant to the hedge fund community because a growing number of hedge fund managers are launching RICs, UCITS and other registered products.  See “Hedge Fund Managers Launching Mutual Funds in an Effort to Stay a Step Ahead of Regulatory Convergence,” The Hedge Fund Law Report, Vol. 2, No. 15 (Apr. 16, 2009); “New Study Offers Surprising Findings on the Incentives Created by Concurrent Management of Hedge and Mutual Funds,” The Hedge Fund Law Report, Vol. 2, No. 23 (Jun. 10, 2009).  To the extent the investment strategies of hedge funds and RICs overlap, managers may have occasion to allocate the same deals to both categories of funds.  In such circumstances, at least in the U.S., beyond the fiduciary duty and anti-fraud considerations always lurking in the background of allocation decisions, managers also must consider Rule 17d-1 under the Investment Company Act of 1940 (Investment Company Act).  See “Can Mutual Funds Rely on the Recent T. Rowe Price No-Action Letter to Invest in Hedge Funds?,” The Hedge Fund Law Review, Vol. 2, No. 49 (Dec. 10, 2009).  That Rule, its operation in concurrent management scenarios and its implications for hedge fund managers that also manage RICs are explored in this article.

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  • From Vol. 3 No.10 (Mar. 11, 2010)

    Identifying and Resolving Conflicts Arising out of Simultaneous Management of Debt and Equity Hedge Funds

    Many hedge fund managers, especially larger ones, manage multiple hedge funds.  Oftentimes, those multiple hedge funds follow different investment strategies.  While management by a single manager of multiple hedge funds offers certain operational economies of scale (e.g., shared office space, personnel and technology), diversification of the manager’s revenue sources and potentially greater overall revenue, it also creates the potential for conflicts between the interests of the funds.  In particular, simultaneous management by a single manager of both debt and equity funds can create a variety of information and business conflicts that challenge the manager’s ability to satisfy its fiduciary duties to both funds and both sets of investors.  This issue is particularly acute now, at a time when many hedge fund managers that previously focused on equity-related strategies have launched distressed debt funds in an effort to make silk purses out of the many sow’s ears left over from the credit crisis.  In effort to assist hedge fund managers in avoiding or navigating these conflicts, this article: discusses fiduciary duty as it relates to the relevant conflicts, both under Delaware law and the Investment Advisers Act; identifies specific examples of the potential conflicts, including five investment issues (e.g., consequences to both the equity and debt funds when a reorganization would benefit the debt but wipe out the equity) and two information issues (e.g., consequences to the equity fund when its manager receives material, non-public information in the course of also managing a debt fund); and evaluates the pros and cons of specific ex ante and ex post remedies for both the information issues and investment issues.

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  • From Vol. 2 No.32 (Aug. 12, 2009)

    Conflicts and Opportunities Offered by Concurrent Management of Employee-Owned Hedge Funds and Outside-Investor Hedge Funds

    When a hedge fund manager manages concurrent funds with different investor bases, investors are reasonably concerned about how investment opportunities that fall within the mandate of both funds may be allocated.  For example, investors in one fund may be concerned that the other fund is “front running” the fund in which they are invested.  On “front running,” see “Hedge Fund Manager Kenneth Pasternak Cleared of Securities Fraud,” The Hedge Fund Law Report, Vol. 1, No. 15 (Jul. 8, 2008).  Even short of that, managers must address concerns about the fair and transparent allocation of investment opportunities and managerial efforts.  As Gregory Nowak, Partner at Pepper Hamilton LLP, told The Hedge Fund Law Report in an interview, investors want to know that managers are “eating their own cooking.”  The potential conflicts inherent in simultaneous management of multiple funds can be especially pronounced when one of the funds is a proprietary fund, owned by employees of the management firm, and another fund includes outside investors.  If the employee-owned fund gains and the outside-investor fund gains less, does not gain at all or loses, there will be questions from the outside investors, as happened earlier this year to Renaissance Technologies.  Renaissance’s Medallion Fund, a hedge fund whose investors consisted of Renaissance principals and employees, gained 12 percent in the first four months of 2009, while Renaissance Institutional Equities Fund, with outside investors, lost 17 percent in the same period.  In a conference call with fund management, the outside investors demanded explanations for the divergent performance – even though the funds had significantly different investment mandates.  Against this backdrop, this article addresses the following questions: how common is the practice of operating an employee-owned fund alongside an outside-investor fund?  What are the benefits of such an arrangement?  Who constitutes a “knowledgeable employee” for purposes of beneficial ownership of an employee-owned fund?  And, what are the drawbacks of such an arrangement, and how can they best be managed?

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  • From Vol. 2 No.23 (Jun. 10, 2009)

    New Study Offers Surprising Findings on the Incentives Created by Concurrent Management of Hedge and Mutual Funds

    For some time, conventional wisdom has held that where an investment manager manages hedge and mutual funds simultaneously, the manager will have an incentive to favor the hedge fund with better investment opportunities, and to direct the less interesting opportunities to the mutual fund.  The source of this supposed favoritism was fees: since the total fees paid by the hedge fund to the manager are higher than the fees paid by the mutual fund, the manager would stand to collect greater total fees by directing the better opportunities to the hedge fund.  The manager’s fiduciary duty to all of its funds was understood to mitigate this incentive – but not to eliminate it, especially in the closer, harder-to-monitor cases.  However, a new study upends the conventional wisdom.  We detail the findings from that study and what it may mean for hedge fund managers.  We also discuss issues arising from the management by one hedge fund manager of multiple hedge funds with different investor bases – one consisting of outside investors and the other consisting of principals and employees of the manager.

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