Beyond the Master-Feeder: Managing Liquidity Demands in More Flexible Fund Structures

The private funds industry has been discussing the convergence of hedge and private equity funds for over a decade. The presence of “hybrid” fund vehicles, combining characteristics of both open- and closed-end funds, is nothing new. See “Institutional Investor Forum Focuses on Hedge Fund Manager Fiduciary Duty, SEC Subpoena Power, Hybrid Hedge Fund Structures, Managed Account Platforms, Codes of Ethics and More” (Feb. 4, 2010); and “Can a Capital on Call Funding Structure Fit the Hedge Fund Business Model?” (Nov. 5, 2009). Creatively structured investment vehicles that address relevant investment objectives, or regulatory, tax or similar issues, are becoming increasingly common. As private fund managers struggle to outperform the market and meet investor demands for bespoke fee, liquidity and special terms, those managers will often need to look beyond the master-feeder structure that has served them well for quite some time. For example, hedge funds with historically liquid portfolios are increasingly pursuing assets with longer investment horizons that, in the past, might have been housed in private equity-style products. In a guest article, Akin Gump partner Ira P. Kustin explores a number of tools that managers can use to effectively manage assets with different liquidity characteristics, while also addressing investor liquidity expectations. For additional insight from Kustin, see “Stars in Transition: A New Generation of Private Fund Managers” (Dec. 10, 2009); and “Addressing (and Resisting) Demands for Changes in Hedge Fund Manager Compensation” (Apr. 23, 2009).

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