Hedge fund managers often launch onshore and offshore versions of funds following substantially similar investment strategies. Funds in different jurisdictions are intended to be different in some ways and similar in other ways. They are intended to be different in terms of tax and regulation because different investors are subject to different tax and regulatory regimes. (For example, U.S. tax-exempt entities
often invest in offshore hedge funds to, among other things, avoid paying tax on Unrelated Business Taxable Income
.) They are typically intended to be similar in terms of strategy and performance, particularly where the onshore and offshore funds are feeders in a master-feeder or similar structure. See “Hedge Fund Managers Using ‘Mini-Master Funds’ to Retain Favorable Tax Treatment of Performance-Based Revenue from Offshore Funds
,” Hedge Fund Law Report, Vol. 2, No. 22 (Jun. 3, 2009). Notably, onshore and offshore funds are intended to be similar in terms of fund governance. However, the different structures typically used for onshore and offshore funds inhibit the similarity of governance across jurisdictions, at least structurally. Many onshore funds are structured as limited partnerships, with no explicit governing body, and many offshore funds are structured as corporations, with a board of directors. Experience and caselaw have highlighted shortcomings in the fund director model as it is often deployed. See “The Cayman Islands Weavering Decision One Year Later: Reflections by Weavering’s Counsel and One of the Joint Liquidators
,” Hedge Fund Law Report, Vol. 5, No. 36 (Sep. 20, 2012); “The Case in Favor of Focused, Experienced and Independent Hedge Fund Directors
,” Hedge Fund Law Report, Vol. 4, No. 3 (Jan. 21, 2011). Nonetheless, a growing chorus of institutional investors has highlighted the asymmetry in governing structures in the course of due diligence
– focusing in particular on the absence of a board of directors of domestic hedge funds. In response to the expressed concerns of institutional investors on this topic, hedge fund managers have started to explore – and in some cases, to implement – advisory committees. Part of the purpose of such committees is to serve as a proxy board of directors for domestic funds. But they do more than that for domestic funds, and also provide services to offshore funds. They are an important, yet insufficiently understood, innovation in the relationship between hedge fund managers and investors. To shed much-needed light on this innovation, the Hedge Fund Law Report is publishing this two-part series designed to help hedge fund managers and investors understand the reasons for and mechanics of establishing an advisory committee. This first installment addresses what advisory committees are; their principal functions; how they are different from offshore fund boards of directors; how much authority advisory committees typically have; and the principal benefits and drawbacks of organizing and operating advisory committees. The second installment will discuss what types of funds should organize advisory committees; the process of organizing an advisory committee (including determining the committee’s composition); the operation of advisory committees; benefits and drawbacks of serving as an advisory committee member; and liability and indemnity protections afforded to members of an advisory committee.