Hedge Fund Managers Grapple with Legal and Practical Consequences of Demands from CalPERS, URS and Other Pension Funds for Better Investment Terms and Separate Accounts

While better investment terms cannot completely offset poor hedge fund performance, poor or middling performance can increase the receptivity of managers to restructuring of their relationships with investors – especially large institutional investors.  Accordingly, while the credit crisis has engendered a rash of redemptions, it has also occasioned a series of restructurings of the terms under which significant institutions remain invested in hedge funds or make new investments.  However, while the terms of such restructurings have received significant and deserved attention, topics that have received less attention – but that may be as or more important than the terms themselves – include the mechanics by which the terms are implemented, and the legal considerations that may arise in connection with such implementation.  We explore these operational and legal considerations in detail, including: the relevant language in fund documents; investor consent requirements; liquidity issues; most favored nation provisions; redemption, registration and allocation issues; and cost considerations.

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