Trade errors can prove to be catastrophic for hedge fund managers, particularly where the firm fails to adopt policies, procedures and controls designed to appropriately identify, prevent, detect and handle such errors. The task of instituting robust trade error practices has been complicated by the lack of significant guidance in this area. Nonetheless, regulators and investors remain keenly focused on evaluating how hedge fund managers approach trade errors. With this backdrop, the Hedge Fund Law Report is publishing this second installment in a three-part article series designed to help hedge fund managers understand and navigate the legal, investment and operational challenges presented by trade errors. This article outlines measures to: prevent trade errors; detect trade errors after they occur; report trade errors once identified; resolve trade errors; and calculate losses resulting from trade errors. This article also discusses whether soft dollars can be used to correct trade errors. The first article in this series discussed the challenge of defining a trade error; a manager’s legal obligations relating to the handling of trade errors; and the policies and procedures that managers should consider to prevent, detect, resolve and document trade errors. See “How Should Hedge Fund Managers Approach the Identification, Prevention, Detection, Handling and Correction of Trade Errors? (Part One of Three)
,” Hedge Fund Law Report, Vol. 6, No. 10 (Mar. 7, 2013). The third installment in this series will discuss the allocation of losses and gains resulting from trade errors among a manager and its clients; limitations on the allocation of trade error losses; documentation of trade errors; whether managers can obtain insurance to cover losses resulting from trade errors; and common mistakes managers make in handling trade errors.