Opalesque Exclusive: Hedge fund redemptions – the legalities surrounding freezing assets: Can a manager use the fund to finance defense in any litigation?
Kirsten Bischoff, Opalesque New York: Earlier this year Wood Creek Capital Management sued SageCrest for reneging on a redemption agreement. More recently, Gottex Fund Management filed a complaint with the US District Court of Connecticut charging Stewardship Investment Advisors and Managing Director Marlon Quan with fraud, intentional and negligent misrepresentation and breach of the covenant of good faith and fair dealing.

As the hedge fund industry deals with increased redemptions in conjunction with illiquidity in the markets there will be fund managers who need to make the difficult decision to freeze redemptions. Opalesque spoke with Ron Geffner and Doug Hirsch both Partners in the law firm Sadis Goldberg LLP (SG) about some of the legal implications of freezing assets. Hirsch, who is the Head of SG’s Litigation and Regulatory Compliance Group noted the definite uptick in redemption lawsuits which his team has seen of late. “It is one of the important hedge fund issues of the day.”

Geffner oversees the Financial Services Group and structures, organizes and counsels private investment vehicles and began his career with the United States Securities and Exchange Commission. He advises that the review of a fund’s limited partnership agreement should allow managers and investors alike to understand exactly what the manager’s requirements are in initiating a redemption freeze. “Although with fund documents drafted over the past several years there are certain industry standards, if you have an old fund, often its documents may not contain the most current, up to date provisions.”

For investors
For an investor deciding to take legal steps to redeem frozen assets from a hedge fund manager it is important to note whether or not the manager has the right to use the fund to finance the defense of their action in any litigation. The limited partnership agreement will also detail how or if a fund manager is required to communicate to investors that the decision to freeze redemptions has been made, as well as what form redemptions may take. In the Gottex lawsuit Stewardship pa......................

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