Identifying and Resolving Conflicts Arising out of Simultaneous Management of Debt and Equity Hedge Funds
Hedge Fund Law Report
Many hedge fund managers, especially larger ones, manage multiple hedge funds. Oftentimes, those multiple hedge funds follow different investment strategies. While management by a single manager of multiple hedge funds offers certain operational economies of scale (e.g., shared office space, personnel and technology), diversification of the manager’s revenue sources and potentially greater overall revenue, it also creates the potential for conflicts between the interests of the funds. In particular, simultaneous management by a single manager of both debt and equity funds can create a variety of information and business conflicts that challenge the manager’s ability to satisfy its fiduciary duties to both funds and both sets of investors. This issue is particularly acute now, at a time when many hedge fund managers that previously focused on equity-related strategies have launched distressed debt funds in an effort to make silk purses out of the many sow’s ears left over from the credit crisis. In effort to assist hedge fund managers in avoiding or navigating these conflicts, this article: discusses fiduciary duty as it relates to the relevant conflicts, both under Delaware law and the Investment Advisers Act; identifies specific examples of the potential conflicts, including five investment issues (e.g., consequences to both the equity and debt funds when a reorganization would benefit the debt but wipe out the equity) and two information issues (e.g., consequences to the equity fund when its manager receives material, non-public information in the course of also managing a debt fund); and evaluates the pros and cons of specific ex ante and ex post remedies for both the information issues and investment issues.