Legal Risks for Hedge Fund Managers of Using Target Returns (Part Two of Two)

In addition to the potentially negative consequences – including the loss of investor credibility, potential investor dissatisfaction, client redemptions and reputational harm – that can result from it, the use of target returns or performance targets by hedge fund managers in offering documents or marketing materials also gives rise to legal and regulatory risks.  See “Aite Group Report Identifies the Building Blocks of Institutional Credibility for Hedge Fund Managers: Operational Efficiency, Robust Risk Management, Integrated Technology and More,” Hedge Fund Law Report, Vol. 6, No. 36 (Sep. 19, 2013).  Hedge fund managers need to consider these potential legal and regulatory risks, along with the potential benefits and other consequences, when deciding to use target returns.  This article, the second in a two-part series, analyzes the legal risks associated with target returns and weighs the benefits of using target returns against those risks.  The first article discussed common practices for the use of target returns by hedge funds; analyzed reasons for using target returns; and highlighted some potential drawbacks of using target returns.

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