Robert Bodansky Quoted in the Hedge Fund Law Report
“How Can Hedge Fund of Funds Managers Manage a ‘Liquidity Mismatch’ Between Their Funds and Underlying Hedge Funds?”

Robert Bodansky was quoted in the October 7, 2009 Hedge Fund Law Report article, “How Can Hedge Fund of Funds Managers Manage a ‘Liquidity Mismatch’ Between Their Funds and Underlying Hedge Funds?” The article discussed the growing trend toward retailization of hedge funds of funds (FOFs), which faces a considerable practical hurdle: retail investors demand frequent liquidity, while many of the more interesting opportunities for underlying hedge funds remain in less liquid investments.

The article outlined the practical and legal bases for the obligation on the part of FOF managers to conduct thorough due diligence, especially with respect to the match between the liquidity of the FOF and the hedge funds in which it invests; the so-called “FOF regulatory loophole;” structural changes in the FOF market; the benefits and burdens of investments by FOFs in only liquid underlying finds; the early notification approach; FOF disclosure matters; side letters; and fee deferrals.

Bob noted, “Some [underlying] funds are now willing to agree that if they are unable to make a liquid distribution to investors over a period, then they will defer taking fees out of the fund until liquidity is restored. Institutional investors don’t want the management taking out whatever limited liquidity may then exist, effectively giving management a preference over the investors. We’re starting to see some acceptance of that.”