As private fund managers seek to diversify their product offerings and lines of business, management companies are increasingly operating hedge funds and private equity funds simultaneously. However, such simultaneous management gives rise to potential conflicts of interest, including issues relating to allocation of investment opportunities between the funds, possession of material nonpublic information, valuation and allocation of expenses. The SEC has identified conflicts of interest as one of the top enforcement priorities for 2015, and the SEC’s Asset Management Unit is expected to continue examining advisers to determine whether they have appropriately discharged their fiduciary obligations to identify conflicts of interest and eliminate them or mitigate and disclose them. See “ACA Compliance Professionals and SEC Veteran John H. Walsh Share Insights on SEC Priorities for 2015
,” Hedge Fund Law Report, Vol. 8, No 16 (Apr. 23, 2015); and “Conflicts Remain an Overarching Concern for the SEC’s Asset Management Unit
,” Hedge Fund Law Report, Vol. 8, No. 10 (Mar. 12, 2015). Accordingly, especially in today’s regulatory environment, managers must be aware of and mitigate such conflicts of interest. This article, the first in a three-part series, explores the structural considerations that give rise to potential conflicts and examines the potential conflicts involving the investments held by each fund, as well as conflicts with the allocation of investment and disposition opportunities between affiliated hedge funds and private equity funds. The second article will discuss operational conflicts arising out of simultaneous management of hedge funds and private equity funds, including conflicts involving the possession of material nonpublic information, valuation, allocation of expenses, personal trading and investors. The third article will address offshore concerns and ways to mitigate conflicts of interest. See also “Investment Allocation Conflicts Arising Out of Simultaneous Management of Hedge Funds and Alternative Mutual Funds Following the Same Strategy (Part One of Three)
,” Hedge Fund Law Report, Vol. 8, No. 13 (Apr. 2, 2015).