Delaware Chancery Court Decision Highlights the Imperative of Thorough Due Diligence on Potential Hedge Fund Business Partners
Hedge Fund Law Report
As a hedge fund manager, you are required as a legal matter to “know your customers,” that is, your investors. In addition, you are required as a practical matter to know your partners. In many cases, this imperative is beside the point: many hedge fund management businesses are founded by partners that have been working together for years. In other cases, however, management companies are organized by partners that met only recently. In such cases, the partners should perform thorough due diligence on one another. It may seem contrary to the optimism, trust and team spirit required to scale the increasingly high barriers to beginning in the hedge fund business. But a recent Delaware Chancery Court (Court) opinion highlights the fact that the stakes are too high to rely on gut feelings. The stakes are even too high to rely on routine due diligence conducted by credible service providers. The stakes are nothing less than your personal reputation, and in the investment management business, that is all you have or can have. Diligence in this context should be deep, customized and cross-checked. Once you get into bed with a bad actor in the investment management business, it is virtually impossible – from a reputation point of view – to get out.