Managing Hedge Fund Risk and Financing: Adapting to a New Era

Constitutional Documents

An investor contributes to the limited partnership by subscribing for shares, usually under the terms of a limited partnership agreement, subscription agreement, offering document, and potentially a side letter. The fund in turn invests the capital raised from subscribers in the investments and market(s) described in the offering document. The rights and obligations of investors as shareholders in the fund, the terms of redemption and method of valuation are normally set out in the offering document and the company's articles. The shares for which investors subscribe are issued at a fixed price at launch. Thereafter, the fund may raise further capital by issuing new classes of shares at a fixed price, or additional shares of the same class at prices related to the net asset value of the investment portfolio relating to the initial class of shares.

Limited Partnership Agreement

The limited partnership agreement (LPA) is the governing legal document and sets out the rights of the investors and those of the manager and directors of the fund. When an investor becomes a “partner” in the fund, the investor is executing the limited partnership agreement.

Some LPAs address matters that raise few risk management concerns. Others, however, are of more concern to the risk manager and CFO of the fund as they may have significant funding implications in a time of market crisis.

Common items which are included in the LPA are:

• Rights and duties of the directors of the ...