Thursday, June 22, 2006

Hedge Fund Side Letters

Another aspect of hedge funds that must be of concern to fiduciary investors is the utilization of “side letters”. Side letters can provide certain beneficial options to select investors which may be to the detriment of other investors. Under securities law, these preferential deals are not illegal provided they are disclosed. It may be more difficult for a fiduciary to substantiate how an investment like this, with materially different terms for a certain class of investors, could be construed to operate solely in the best interests of their participants and beneficiaries.

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