The intricacies of hedge fund trading are rife with opportunities for trade errors to arise. Hedge fund managers must remain vigilant for situations such as purchases of incorrect amounts of a particular security, inaccurate asset allocations and missed or delayed trades. Registered investment advisers must also establish a compliance program that includes policies and procedures for addressing trade errors under the Investment Advisers Act of 1940, and the SEC remains interested in trade errors and their resolution when examining hedge fund managers. However, crafting and executing policies and procedures to address trade errors requires a hedge fund manager to choose from many options. What should the scope of the policy be? Who bears responsibility for trade errors and operational procedures under the policy? These and other questions must be dealt with consistently by the manager. In an effort to determine industry best practices for addressing trade errors, the Hedge Fund Law Report conducted a survey of hedge fund managers. This first article in a two-part series presents the results of that survey with respect to the fundamentals of trade error policies and handling trade errors. The second article
will discuss detection of and responsibility for trade errors, as well as other operational considerations. For more on trade errors, see “Katten Forum Identifies Best Practices for Hedge Fund Managers Regarding Best Execution, Soft Dollars, Principal Trades, Agency Cross Trades, Cross Trades and Trade Errors
,” Hedge Fund Law Report, Vol. 7, No. 10 (Mar. 13, 2014); and “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).