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    Apr. 15, 2008

Gates Provide Safety Valves for Hedge Funds and Investors

  • A gate is a provision in a fund’s governing documents authorizing the adviser to suspend redemptions when redemption requests as of a certain date exceed a stated threshold of the fund’s net assets (usually from 15 to 25%).
  • By putting a damper on withdrawals, gates protect the interests of both fund managers and non-redeeming investors.
  • Consensus among investment professionals appears to be that gates are more palatable to investors than longer lockup periods.
  • Even with a gate, a fund manager needs to be a good communicator in order to have the best chance of convincing investors to hang in there during tough times.

Bear Stearns Hedge Funds Liquidators Sue Bear Entities and Others for Fraud

Liquidators of Bear Stearns High-Grade Structured Credit Strategies (Overseas) Ltd. and Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage (Overseas) Ltd. sued various Bear Stearns entities, related individuals and the funds’ accountant alleging fraud, breach of fiduciary duty and negligence in connection with the collapse of the funds.

Financial Stability Forum Issues Report on Enhancing Market and Institutional Resilience

  • Financial Stability Forum issues, and G-7 finance ministers adopt, report recommending reforms in several broad areas, including the following:
  • increased oversight of capital, liquidity and risk management;
  • enhanced transparency and evaluation;
  • changes in the role and use of credit ratings;
  • strengthening authorities’ responsiveness to risk; and
  • enhancing responsiveness of central banks to stress in the financial system.

Hedge Fund Manager Cannot Prove Breach of Contract by Ex-employee Without Proof of Written Contract

  • Original, expired written employment agreement included disclosure restrictions.
  • Subsequent unsigned drafts included non-compete and confidentiality clauses, but employer failed to produce a signed copy.
  • Employer alleged employee orally and repeatedly renewed contract.
  • After receiving $450,000 alleged “advance,” employee resigned and began working for competing fund management firm, but employee asserted payment was for work already performed.
  • Employer sued for fraud, breach of contract, misappropriation of trade secrets and breach of confidentiality.
  • Affidavit of existence of lost executed contract failed to satisfy statute of frauds.
  • Employee asserted his employment was “at-will” and thus he was not bound by non-compete clause.
  • Employer failed to prove enforceable written employment contract and so failed to raise any genuine issue of material fact.

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