Articles By Topic
By Topic: Concurrent Management
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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. 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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