Hedge fund investors, including funds of funds, ultimately want certainty once they redeem their investments in hedge funds. However, in recent years, this certainty has eroded (and therefore, investors’ confidence has been shaken) as proactive bankruptcy trustees have sought to claw back redemption proceeds from investors that redeemed their investments prior to the declaration of bankruptcy by hedge funds, particularly those funds that invested in Ponzi schemes. See “Federal Court Affirms the Ability of a Bankruptcy Trustee to Claw Back Fictitious Profits from Investors in LPs or LLCs Operated as Ponzi Schemes
,” Hedge Fund Law Report, Vol. 4, No. 45 (Dec. 15, 2011). In such cases, trustees have pressed claims based on the theory that the redemption proceeds represent fraudulent transfers. However, the Bankruptcy Code (Code) provides a safe harbor provision (Safe Harbor Provision), found in Sections 546(e) and 546(g) of the Code, that protects investors by effectively barring trustees from making such claims against certain persons that have been paid prior to the declaration of bankruptcy by an estate, such as a hedge fund. A recent opinion issued by a federal Bankruptcy Court provides some welcome news for hedge fund investors with respect to the application of the Safe Harbor Provision, as it is applied in the hedge fund context. This article describes the facts and legal analysis in that opinion.