The Hedge Fund Law Report

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

Articles By Topic

By Topic: Track Records

  • From Vol. 9 No.45 (Nov. 17, 2016)

    Trending Issues in Employment Law for Private Fund Managers: Non-Compete Agreements, Intellectual Property, Whistleblowers and Cybersecurity

    Attracting, compensating and retaining talented employees is a critical part of a fund manager’s business. Managers routinely use non-compete agreements and other measures to ensure that employees do not harm the manager’s business when they depart. A recent program presented by EisnerAmper offered an overview of the law of non-compete agreements and insight into other common employment issues that private fund managers face, including portability of track records, status of employees, protection of intellectual property and cybersecurity. Moderated by EisnerAmper director Frank L. Napolitani, the program featured Cole-Frieman & Mallon partner John Araneo. This article highlights the key takeaways from the presentation. For additional insight from EisnerAmper, see our three-part series on how hedge funds can mitigate FIN 48 exposure in certain jurisdictions: Europe (Mar. 17, 2016); China (Mar. 24, 2016); and Australia and Mexico (Mar. 31, 2016); as well as our two-part series on hedge fund audit holdbacks: “Operational Considerations” (Sep. 10, 2015); and “Implementation” (Sep. 17, 2015).

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  • From Vol. 5 No.26 (Jun. 28, 2012)

    Delaware Chancery Court Decision Highlights the Imperative of Thorough Due Diligence on Potential Hedge Fund Business Partners

    As a hedge fund manager, you are required as a legal matter to “know your customers,” that is, your investors.  In addition, you are required as a practical matter to know your partners.  In many cases, this imperative is beside the point: many hedge fund management businesses are founded by partners that have been working together for years.  In other cases, however, management companies are organized by partners that met only recently.  In such cases, the partners should perform thorough due diligence on one another.  It may seem contrary to the optimism, trust and team spirit required to scale the increasingly high barriers to beginning in the hedge fund business.  But a recent Delaware Chancery Court (Court) opinion highlights the fact that the stakes are too high to rely on gut feelings.  The stakes are even too high to rely on routine due diligence conducted by credible service providers.  The stakes are nothing less than your personal reputation, and in the investment management business, that is all you have or can have.  Diligence in this context should be deep, customized and cross-checked.  Once you get into bed with a bad actor in the investment management business, it is virtually impossible – from a reputation point of view – to get out.

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  • From Vol. 4 No.40 (Nov. 10, 2011)

    Portability and Protection of Hedge Fund Investment Track Records

    A hedge fund’s performance history, or track record, can be one of its most valuable assets.  A fund that has developed a successful track record will want to promote that track record as evidence of its own capabilities and protect that track record from being claimed or distorted by others.  On the other hand, a portfolio manager or other employee who has developed a successful track record will want to take that track record with him when he leaves the fund and use it to attract his own investors.  A fund or portfolio manager with a poor track record may want to avoid or limit the disclosure of past performance.  In a guest article, Sean R. O’Brien and Sara A. Welch, Managing Partner and Counsel, respectively, at O’Brien LLP, along with Joel A. Blanchet, a Partner at Kirkland & Ellis LLP, explore the manner in which the law affects investment funds, investment adviser firms and individuals when it comes to the portability of track records, and identify steps that funds and portfolio managers can take to protect their respective rights with respect to those track records.  At the outset, this article discusses who owns an investment track record and therefore, who can use such a track record.  The following sections detail regulatory guidance provided by the Securities and Exchange Commission (SEC), industry guidance provided by the CFA Institute and court decisions on the ownership and portability of track records.  The article concludes with a discussion of contractual provisions hedge fund managers can use to protect their investment track records from misappropriation and misuse.  For more on O’Brien LLP, see “Sean R. O’Brien Launches Boutique Law Firm Focused on Hedge Fund Litigation,” below, in this issue of The Hedge Fund Law Report.  For more by O’Brien LLP attorneys, see “Protecting Hedge Funds’ Trade Secrets: The Federal Government’s Enforcement of Criminal Laws Protecting Proprietary Trading Strategies,” The Hedge Fund Law Report, Vol. 3, No. 48 (Dec. 10, 2010).

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  • From Vol. 4 No.40 (Nov. 10, 2011)

    Principals of Paron Capital Management Sue Rothstein Kass for Negligence, Fraud and Breach of Contract Based on Alleged Failure to Obtain Third-Party Verification of Performance Results

    Plaintiffs Peter McConnon (McConnon) and Timothy Lyons (Lyons) are the current principals of plaintiff investment manager Paron Capital Management, LLC (Paron).  In April 2010, McConnon and Lyons were introduced to James Crombie (Crombie), who claimed to have run a successful commodity futures trading business and desired to form a new trading business with McConnon and Lyons.  McConnon and Lyons claim that Paron retained defendant accounting firm Rothstein, Kass & Company, LLP (Rothstein Kass) to verify Crombie’s claimed returns.  In particular, they asked Rothstein Kass to obtain third-party confirmation of data provided by Crombie.  According to the complaint, Rothstein Kass never did so.  It turned out that the historical performance data supplied by Crombie was a complete fabrication.  That false data formed the basis of Paron’s marketing materials.  Following investigations and enforcement actions by the National Futures Association and the U.S. Commodity Futures Trading Commission, Paron and Crombie were banned from futures trading and Paron’s business collapsed.  The plaintiffs seek damages from Rothstein Kass for negligence, fraud and breach of contract.  We detail the plaintiffs’ allegations and the allegations and findings in the enforcement actions.  Rothstein Kass told The Hedge Fund Law Report with respect to this matter: “We have no comment on these meritless claims.”

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