In an evolving industry known for its swift pace and competitiveness, balancing high expectations of sophisticated investors while managing funds with the utmost standards of good faith and fiduciary duty can generate a variety of liability exposures for hedge funds or private investment funds and their managers. The implementation of registration requirements may add new complexities to hedge fund and private investment fund operations. Golsan Scruggs understands your private equity/hedge fund industry and has a wide range of insurance products designed to protect your firm.
THE BASIS OF RISK
Investors in private funds consistently generate litigation against investment advisers of private funds, particularly over allegedly deficient performance. When a private fund performs poorly, investors in the fund may seek to recoup some of their losses through litigation against the adviser. Because there is no viable cause of action for mere poor performance, investors can take a couple of different angles in bringing such litigation and certainly may pursue multiple approaches in filing suit: causes of action for misrepresentation, failure or insufficient disclosure, negligence, breach of contract and/or breach of fiduciary duty. Three main areas of attack are as follows:
- Investors may allege that the prospectus for investors contained material inaccuracies. For example, investors might allege that the prospectus did not adequately disclose the risks associated with the investment strategy or contained inaccurate statements about historical performance.
- Investors may allege that the poor performance resulted from negligence. The investor might argue that the private fund did not execute on its proposed strategy, that the investment adviser did not exercise due diligence in choosing which portfolio companies in which to invest or that it did not effectively manage the fund portfolio.
- Investors in a private fund may allege that the investment adviser engaged in improper conduct to maximize the adviser’s interests at the expense of investors. A common set of allegations involves performance fees for non-liquid assets. If an investment adviser is receiving fees based on both assets under management and performance, it may have an incentive to overvalue fund assets or avoid a write down of poorly performing assets.
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