Katherine Burton and Saijel Kishan of Bloomberg report that investors in the the recently embattled hedge fund SAC Capital are being refused their request for an early redemption of their capital.
Steven Cohen’s $14 billion SAC Capital Advisors LP, which last month was indicted by the government as a “veritable magnet for market cheaters,” has refused clients’ requests that the firm speed up payouts on the billions of dollars earmarked for withdrawals, according to three people familiar with the discussions.
SAC, which faces a midnight deadline for redemption requests from investors who want to pull money from the firm, has told clients that final payments will be made at the end of the year. Some investors have pushed Cohen to give clients their money back before then....
An expert quoted in the story states that the manager is under no obligation to return capital to investors on terms more generous than what is required from the express terms of the investment. However, a failure to return capital even if not contractually required to do so may actually lay the basis for a breach of fiduciary duty claim.
Hedge fund managers generally owe a fiduciary duty under state limited partnership law to exercise their discretion in deciding whether to return funds in the best interests of the fund and its investors. In the 2011 decision of Paige Capital Management, LLC v. Lerner Master Fund, LLC, the Delaware Court of Chancery found a hedge fund manager in breach of its fiduciary duties when it decided not to waive a gating provision and release capital back to the fund's sole investor. The court stated that
I conclude that it was a breach of fiduciary duty for the hedge fund manager to use the Gates solely for a selfish reason. The only rational reason for the failure to take down the Gates was to enable the manager to continue to receive management fees for as long as possible. The manager's purported rationale was based on the manager's unconvincing assertion that the Gates in the Partnership Agreement are not only designed to protect the Fund and its investors from harm, but also as a contractual provision intended to guarantee a cash flow to the manager for a longer period of time. But that is a rationale that was never advanced in the contractual negotiations. The discretion granted to the hedge fund manager to determine whether to waive the Gates is a fiduciary authority that must be used for the benefit of those whom the Hedge Fund is intended to benefit, and not for the selfish interest of the manager.
SAC Capital likely has justifiable ("nonselfish") reasons to not return more capital to investors than their investment agreements require. It is also unclear whether the funds in question are organized in a jurisdiction that follows Delaware's approach or whether the fund's organizing documents waive any fiduciary duty owed by the manager (as a general partner) to the investors (as limited partners).
Nonetheless, the failure to return capital to investors may implicate fiduciary duties that go above and beyond the express terms of investors' negotiated redemption rights. It is not a simple matter of what rights investors had previously negotiated.
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