The Hedge Fund Law Report

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

Recent Issue Headlines

Vol. 3, No. 21 (May 28, 2010) Print IssuePrint This Issue

  • 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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  • Transaction Analysis: Hedge Fund Managers Man Group and GLG Partners Announce Plans to Merge

    On May 17, 2010, Man Group plc (Man Group), the world’s largest publicly-traded hedge fund manager, and GLG Partners, Inc. (GLG), another hedge fund manager, announced an agreement for Man Group to acquire GLG in a $1.6 billion transaction that would create an alternative investment manager with approximately $63 billion of funds under management.  The proposed acquisition will occur through two concurrent transactions: (1) a cash merger among GLG, Man Group and a Man Group merger subsidiary; and (2) a share exchange among GLG’s principals (Noam Gottesman, Pierre Lagrange and Emmanuel Roman, together with their related trusts and affiliated entities) and two limited partnerships that hold shares for the benefit of key personnel who participate in GLG’s equity participation plan, and Man Group.  The Board of Directors of GLG has unanimously approved the merger and share exchange agreements and recommends that GLG’s stockholders adopt and approve the merger agreement and the merger.  This article summarizes the relevant background of the two hedge fund managers and the structure and terms of the proposed transaction.

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  • New York State Appellate Division Denies Bid by Hedge Fund QVT LP to Establish that its Claim for Indemnification Pursuant to a Merger Agreement with Biosynexus Inc. Was Valid on its Face

    In 2005, defendant hedge fund QVT Fund LP (Fund) entered into an agreement and plan of merger (the Merger Agreement) with target company Biosynexus Inc (Biosynexus).  The target’s principal shareholder was plaintiff Orbimed Advisors, LLC (Orbimed).  At closing, Orbimed and the other selling shareholders placed a portion of the proceeds of the sale into escrow to secure their duty to indemnify the Fund for certain breaches of the representations and warranties made in the Merger Agreement.  The indemnification provision was to survive for one year and, if no claim was made, the escrow was to be released to the selling shareholders.  Days before the indemnification provision was to expire, the Fund submitted a claim to Orbimed.  After the expiration date, Orbimed commenced an action seeking a declaration that the Fund’s claim did not satisfy the requirements of the Merger Agreement and demanding release of the entire escrow to the selling shareholders.  The Fund moved to dismiss the complaint on the grounds that its notice was sufficient as a matter of law.  The trial judge determined that Orbimed had stated a valid cause of action against the Fund for release of the escrow.  The Appellate Division affirmed.  We summarize the facts surrounding the claim for indemnification and the court’s reasoning.

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  • Massachusetts Pension Head Travaglini Resigns, Heads for Grosvenor Capital

    The head of Massachusetts’ main pension fund, Michael Travaglini, reportedly will be resigning as executive director of the state’s Pension Reserves Investment Management Board, effective June 11, 2010, and moving to Chicago-based asset management firm Grosvenor Capital Management LP in July as a managing director in the firm’s client group.

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  • Appleby Appoints Five New Partners Focusing on Hedge Funds and Related Practices

    Appleby, the provider of offshore legal, fiduciary and administration services, recently announced that five new partners have joined the firm – all from leading offshore law firms – in the funds and investment services and banking and asset finance practices in the corporate and commercial practice group.

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  • Weil Gotshal Adds John Fadely as Funds Practice Partner in Asia

    Weil, Gotshal & Manges announced on May 4, 2010 that John Fadely had joined the firm’s Hong Kong office as a partner and member of the firm’s global funds practice.

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