History doesn’t repeat itself but it does rhyme. The same can be said of negotiations that involve investors and hedge fund managers. Based on my experience, here are five lines that managers use with investors to negotiate the terms of their fund investments, along with some comments:
- “The term is there to protect investors…”
Funny how that argument can pop up in matters that involve fund expenses where investors’ hard-earned dollars are at stake. To quote Augustus, “Hasten slowly.”
- “You’re the only one who has objected to that term…”
Peer pressure sucks, doesn’t it? Raising an objection does not equate to unreasonableness based on what other investors in a fund have done or not done. The discussion should focus on the merits of the objection made, not a shadowboxing exercise with other investors.
- “My lawyer made me put that term in…”
The old good cop/bad cop routine. I like good cop/bad cop routines in movies, but in alternative investments? Not so much. If a manager can’t give investors comfort on why a term exists, there may be bigger issues at stake.
- “We don’t give exceptions to anybody…” (on why a manager won’t grant side letter terms)
In hedge fund lingo, “anybody” is sometimes defined not to include 1) manager personnel, 2) seed investors (who may have a large impact on a fund’s operations) and 3) potential investors in the future that a manager may pursue to invest in its hedge fund by granting preferential investment terms.
- “That term is industry standard…”
Private fund investments are subject to U.S. private placement rules and are privately negotiated. Given the sheer number of private hedge fund products that currently exist, an important issue to consider is what back-up data do certain people rely on when they claim that some fund term or legal condition is “industry standard”? Even in the absence of providing any back-up data, in my experience, this inconvenient fact does not stop certain people from making broad claims (more on this point in a future post). Fund terms can vary significantly from one hedge fund to the next and, in some cases, certain terms are cut differently for different investors in the same fund. Generalizations need to be approached with caution.
After all, everyone is entitled to their own opinions, but not their own facts.