Controls over the fund
There is a final dimension to the legal structure. As any normal com-
pany, the fund and any manager/advisor it may delegate to are owned
by shareholders who have the potential to vote and therefore to wield
significant influence over the companies’ behaviour. The shareholders
are referred to in the regulatory world as controllers, whether they are
individuals or companies, and whether they actually have ownership
or potentially have the power to influence management. Typically
the board of directors of the fund will also be made up of individu-
als from the manager or the advisor. The controllers are relevant as
they can have a significant impact on the actions of the fund or the
manager/advisor and may also be subject to conflicts of interest, for
example, where the ownership of the fund is in the same hands as that
of the manager. In fact, think about this for a moment. Although very
common, you can see an immediate conflict in that the board of the
fund may no longer independently determine whether the actions of
the manager, with which it has a connection, are being taken for the
benefit of the fund’s investors. This could include a fund deciding to
prevent the redemption of your investment, sometimes for reasons
that might hardly be credible, as was the case in 2009.
A good example of when preventing the exit of investors may not be
in the best interest of investors is when an investment strategy has
failed to deliver returns or has incurred some significant losses, but
not crashed and burned. Imagine you are invested in such a strategy.
The manager may still wish to continue to get paid a management fee
in order to sustain its business and therefore keep your money in the
fund. You on the other hand would rather have your money back as
you may simply need the cash or prefer to invest in another oppor-
tunity. During the financial crisis of 2008, this led to the obvious
question for some boards of directors of funds: what should they do?
The choice was to suspend redemptions or to raise gates to delay the
process of redemption, or indeed to give money back to investors. This
had to be decided by funds largely at the bequest of the manager that
had a direct interest in continuing to be paid as opposed to progress-
ing on the basis of what was in the best interest of investors. Today
this remains controversial: even as I write, many of the gates that were
raised after 2008 remain in place. What made things worse was that
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