Hedge fund managers often provide certain investors in hedge funds with separately negotiated ‘side letters’ granting terms that are different from the fund’s standard offering documents. Regulators in the UK and the US have voiced concern at the potential problems presented by the use by hedge funds of such letters. Side letters have also been the subject of recent guidance from AIMA. This article looks at some of the practical problems and considers some legal issues associated with these documents.
BACKGROUND
Side letters have long been a facet of the hedge fund industry. Their prevalence is a function of the relative economic bargaining power of the prospective investor and the fund. Typically, early stage hedge funds, which are eager to gather assets, are more receptive to entering into side letter arrangements. Conversely, hedge funds that have established track records and ample investor demand are less willing to entertain the prospect of entering into side letters.
