In the aftermath of the 2008 financial crisis, some hedge fund managers felt compelled to restructure their funds to manage liquidity and to balance the interests of redeeming and continuing investors. Many such restructurings required investors to either consent to the restructuring or make an election relating to the restructuring. Nonetheless, many such reorganizations were quickly conceived and may not have considered the survivability of side letters pertaining to the original fund investment. In dueling complaints recently filed in courts in the Cayman Islands and New York State, a hedge fund and a fund of funds, and their respective managers, initiated litigation focused on the following question: Does a side letter that granted a hedge fund investor, among other things, preferential redemption rights, survive a hedge fund restructuring, or does such a side letter terminate upon the making of a restructuring election by the hedge fund investor? This article summarizes the complaints, the context and the implications of the litigation for hedge fund managers and investors. On preferential redemption rights generally, see “Are Side Letters Granting Preferential Transparency and Liquidity Terms to One Investor Ipso Facto Illegal?
,” Hedge Fund Law Report, Vol. 4, No. 18 (Jun. 1, 2011).