Key Person Provisions in Hedge Fund Documents: Structure, Consequences and Demand from Institutional Investors
Hedge Fund Law Report
Traditionally, the success of a hedge fund manager and its funds under management flows (or fails to flow) directly from the vision, expertise or acumen of one person, or a small group of people. That person is often, though not invariably, the founder of the manager, and those people are often fellow founding partners, or key hires made subsequent to founding. In a word, key people are the people that generate revenue, and investors are rightfully concerned about what may happen if key people die, become disabled or cease (voluntarily or involuntarily) to actively participate in the management of the funds in which investors are invested. To address and mitigate those concerns, key person provisions are often drafted into various fund or manager documents or into side letters; the current trend is toward inclusion of such provisions in fund operating documents, and away from inclusion of such provisions in side letters. Such provisions take various forms and establish differing mechanics, but generally provide for notification and redemption rights in the event of designated triggering events. This article explores the substance of key person provisions – how they are drafted and the mechanics they establish; the documents in which they are located; the differing consequences of locating the provisions in different documents; the consequences of triggering such provisions; the demand by institutional investors for such provisions; and the relationship between key person provisions and succession planning.