The Hedge Fund Law Report

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

Articles By Topic

By Topic: Manager Investments

  • From Vol. 7 No.21 (Jun. 2, 2014)

    Aligning Employee and Investor Interests Under the Volcker Rule

    The Volcker Rule limits the extent to which bank-affiliated asset managers and their employees may invest in hedge funds that they sponsor.  As a result, such managers need to ensure that any arrangements that allow for employee participation, including compensation arrangements, comply with the final Volcker Rule.  In a guest article, Tram N. Nguyen and Steven W. Rabitz, both partners at Stroock & Stroock & Lavan LLP, examine the different options that managers have under the final Volcker Rule in designing such arrangements.

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  • From Vol. 7 No.9 (Mar. 7, 2014)

    SEC Order Suggests That Private Fund Operating Expenses Should Be Allocated Based on Line-by-Line Determinations Rather Than an Across-the-Board Percentage Split

    On February 25, 2014, the SEC issued an administrative order (Order) against a private equity fund manager and one of its founders and principals accusing the respondents of securities fraud in misappropriating more that $3 million from the funds they managed through improper allocations of operating expenses.  See “How Should Hedge Fund Managers Approach the Allocation of Expenses Among Their Firms and Their Funds? (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 19 (May 9, 2013).  The SEC also claims that the respondents violated provisions of the Investment Advisers Act of 1940 that require securities to be held by a “qualified custodian,” prohibit principal transactions, require effective compliance policies and procedures and prohibit false filings with the SEC.  See “ACA Compliance Report Facilitates Benchmarking of Private Fund Manager Compliance Practices (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 39 (Oct. 11, 2013) (in particular, discussion under subheading Allocations by Private Equity Fund Managers).  This article describes the factual and legal allegations in the Order.

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  • From Vol. 5 No.23 (Jun. 8, 2012)

    SEC Sanctions Quantek Asset Management and its Portfolio Manager for Misleading Investors About “Skin in the Game” and Related-Party Transactions

    Investments by hedge fund managers in their own funds and related party transactions (such as loans from a fund to a manager) exist at opposite sides of the incentive spectrum.  The former – so-called “skin in the game” – is typically thought to align the interests of investors and managers while the latter is seen as pitting the interests of investors and managers in direct conflict.  Investors want to know about both, for obviously different reasons.  A May 29, 2012 SEC Order Instituting Administrative and Cease-And-Desist Proceedings against Quantek Asset Management LLC (Quantek), Javier Guerra, Bulltick Capital Markets Holdings, LP (Bulltick) and Ralph Patino highlights these and other investor considerations.  This article summarizes the SEC’s factual and legal allegations against Quantek, Bulltick, Guerra and Patino, and the settlement among the parties.  The SEC’s action follows private actions against the same or similar parties.  See, e.g., “Fund of Hedge Funds Aris Multi-Strategy Fund Wins Arbitration Award against Underlying Manager Based on Allegations of Self-Dealing,” The Hedge Fund Law Report, Vol. 4, No. 39 (Nov. 3, 2011); “British Virgin Islands High Court of Justice Rules that Minority Shareholder in Feeder Hedge Fund that had Permanently Suspended Redemptions Was Not Entitled to Appointment of a Liquidator,” The Hedge Fund Law Report, Vol. 4, No. 9 (Mar. 11, 2011).

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  • From Vol. 4 No.39 (Nov. 3, 2011)

    Fund of Hedge Funds Aris Multi-Strategy Fund Wins Arbitration Award against Underlying Manager Based on Allegations of Self-Dealing

    According to press reports, on September 28, 2011, Javier Guerra, the portfolio manager of Quantek Asset Management, LLC (QAM) and Quantek Opportunity Fund, LP (Partnership or Feeder Fund), resigned from the Partnership’s Board of Directors as a result of a loss in arbitration to fund of hedge funds investor Aris Multi-Strategy Fund (Aris).  The arbitration panel reportedly concluded that QAM fraudulently induced Aris to invest in the Feeder Fund and ordered Guerra to pay $1 million in damages; Aris had invested $15 million in the Feeder Fund.  This article details the relevant factual and legal allegations in publicly available court documents, and includes links to those documents.  For more on litigation involving Aris, see “New York State Supreme Court Dismisses Hedge Funds of Funds’ Complaint against Accipiter Hedge Funds Based on Exculpatory Language in Accipiter Fund Documents and Absence of Fiduciary Duty ‘Among Constituent Limited Partners,’” The Hedge Fund Law Report, Vol. 3, No. 7 (Feb. 17, 2010); “New York Supreme Court Rules that Aris Multi-Strategy Funds’ Suit against Hedge Funds for Fraud May Proceed, but Negligence Claims are Preempted under Martin Act,” The Hedge Fund Law Report, Vol. 2, No. 51 (Dec. 23, 2009).  For more on the views of Aris’ principals with respect to litigation by hedge fund investors against hedge fund managers, see “Why Are Most Hedge Fund Investors Reluctant to Sue Hedge Fund Managers, and What Are the Goals of Investors that Do Sue Managers?,” The Hedge Fund Law Report, Vol. 2, No. 52 (Dec. 30, 2009).

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  • From Vol. 4 No.11 (Apr. 1, 2011)

    Twelve Operational Due Diligence Lessons from the SEC’s Recent Action against the Manager of a Commodities-Focused Hedge Fund

    On March 15, 2011, the SEC filed a complaint the U.S. District Court for the Southern District of New York against Juno Mother Earth Asset Management, LLC (Juno) and its principals, Arturo Rodriguez and Eugenio Verzili.  The complaint alleges that Juno and its principals started selling interests in the Juno Mother Earth Resources Fund, Ltd. (Resources Fund) in late 2006, and by the middle of 2008, substantially all of the Resources Fund's investors had requested redemptions.  The SEC alleges that during the short life of the Resources Fund, Rodriguez and Verzili engaged in a range of bad acts, including misappropriation of fund assets, inappropriate loans from the fund to the management company, misrepresentations of strategy and assets under management and disclosure violations.  Assuming for purposes of analysis that the allegations in the complaint are true, the complaint illuminates a variety of pitfalls for institutional investors to avoid.  This article describes the factual and legal allegations in the complaint, then details twelve important lessons to be derived from the complaint.  Similar to other articles we have published extracting due diligence lessons from SEC complaints, the intent of this article is to serve as a tool for institutional investors or their agents that can be used directly in performing due diligence, or can be used to update a due diligence questionnaire.  Our hope in publishing this article (and others of its type) is that at least one of the twelve lessons that we extract from the complaint enables an investor to identify a due diligence issue that it otherwise would have missed.  We think that there is no better way to identify future hedge fund frauds than to understand the mechanics and lessons of past frauds.

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  • From Vol. 3 No.21 (May 28, 2010)

    Investments by Hedge Fund Managers in Their Own Funds: Rationale, Amounts, Terms, Disclosure, Duty to Update and Verification

    Corporate and investment management law are replete with doctrines intended to put the interests of investors (principals) ahead of those of managers (agents).  Such doctrines include fiduciary duty, the duty of care, the duty of loyalty and anti-fraud rules.  However, such doctrines routinely run up against human nature.  While generosity, especially in the form of tax-deductible charitable giving, is a noteworthy and laudable trait among the managerial class, selflessness in zero-sum situations – where my loss is your gain – generally is not a defining characteristic of corporate or investment managers.  That’s not why people get into this business.  Yet selflessness among managers is precisely the ideal to which the foregoing doctrines aspire.  The tension between this aspiration and reality is the stuff of daily business news.  In its most tame variety, this tension plays out in the ongoing debates about compensation of executives of public companies.  And in its most extreme incarnation, the tension manifests itself in lurid investment adviser frauds and Ponzi schemes.  Economists call this tension the principal-agent problem.  The problem is that corporate or investment managers have the legal right to decide what to do with assets they do not own, and therefore may take actions that benefit themselves (the managers) but that are not in the best interests of the owners.  The separation of ownership and control is a common feature of public companies, where the equity owned by management is small relative to the equity over which management exercises day-to-day control.  Even in many mutual funds, the management company or individual portfolio manager often only owns a small investment.  By contrast, a distinguishing feature of the hedge fund business model is substantial investment by the hedge fund manager – the individual portfolio manager as well as partners and employees of the management company – in its own funds.  While such investments are not legally required, they are a tradition and an expectation among institutional investors.  Indeed, in its 2009 annual report, the Yale endowment (a pioneer among institutional investors in hedge funds) noted: “An important attribute of Yale’s investment strategy concerns the alignment of interests between investors and investment managers. . . .  [M]anagers invest significant sums alongside Yale, enabling the University to avoid many of the pitfalls of the principal-agent relationship.”  See “Lessons for Hedge Fund Managers on Liquidity, Allocations, Marketing and More from Yale’s 2009 Endowment Report,” The Hedge Fund Law Report, Vol. 3, No. 14 (Apr. 9, 2010).  This article analyzes various aspects of investments by hedge fund managers in their own funds, including: the rationales for such investments from both the investor and manager perspectives; the “market” for the amounts of such investments (as a percentage of the individual manager’s liquid net worth); the concern among investors where the manager has invested too little or too much in its own funds; reinvestment of bonuses in managed funds; the terms of manager investments; when, where and in what level of detail to disclose manager investments and redemptions; whether and in what circumstances managers have a duty to update representations regarding their fund investments; and how investors can verify managers’ representations with respect to their investments.

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