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Alternative Market Briefing

Fund Alignment Rights levels playing field between investors and hedge fund managers

Tuesday, June 17, 2014

Komfie Manalo, Opalesque Asia:

The Fund Alignment Rights issued by the U.S. Internal Revenue Service (IRS) has leveled the playing field between investors and hedge fund managers, particularly in terms of incentive compensation, said business solutions provider OptCapital.

Last week, the IRS issued revenue ruling 2014-18 that allows hedge funds the ability to provide incentive compensation in the form of fair market value (FMV) options or stock appreciation rights (SARs). This new ruling clarifies that stock options and stock-settled SARs, properly designed, can be used as a form of compensation to managers of offshore hedge funds and other "nonqualified entities" under Internal Revenue Code Section 457A.

Rick Ehrhart, president and CEO of Optcapital, commented, "We at Optcapital are excited about the revenue ruling that has finally made this alignment of interests a viable and mutually beneficial arrangement for hedge fund managers and investors alike. With the clarification of this ruling, investors can now ask for, and managers can now offer, Fund Alignment Rights with the use of FMV options/SARs to their investors that serve a long-term advantage to all.

According to Ehrhart, a solution to the traditional compensation alignment problem is to deliver the manager’s incentive fee in the form of a stock option or stock-settled SAR, with a grant price equal to the fair market value of the fund shares on the ......................

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