Fund Terms: ReservesOperational due diligence is a multidisciplinary subject. An investor beginning the operational duedil...
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Hedge fund operational_due_diligence_corgentum_insights_fund_terms_reserves


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Originally posted in the February 2012 edition of Corgentum Consulting's Operational Due Diligence Insights.

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Hedge fund operational_due_diligence_corgentum_insights_fund_terms_reserves

  1. 1. Fund Terms: ReservesOperational due diligence is a multidisciplinary subject. An investor beginning the operational duediligence process for the first time may encounter subjects with which they have little to nofamiliarity. As the scope of operational due diligence has become broadened in recent years, evenseasoned operational due diligence professionals may encounter terms which they may beunfamiliar. The purpose of this section of Operational Due Diligence Insights is to cast a spotlight onsome of the words and terms which investors may have not previously encountered, or which tend toget overlooked in operational due diligence reviews.This issues word : ReservesDefined : Reserves refers to a cushion of cash that a fund can set aside typically, so that there issufficient capital to deal with unforeseen events.What investors should know : Reserves are one of the many landmine terms which can be buried ina funds offering memorandum, which may be activated when an investor least expects it. Oftentimes the language covering reserves will be in the form of a small, seemingly innocuous sentence inthe fund offering memorandum which reads to the effect of, "the fund may establish reserves forcontingencies." The problem is that many times, the term "contingencies" is either completelyundefined or loosely defined at best. What this means in practice is that, as with most things relatedto fund offering memoranda, the fund manager (or the General Partner or Board of Directors etc. asapplicable) basically has broad discretion to put capital aside. Investors may think of reserves as afunds rainy day fund. If the fund manager sets aside reserves that are too large aside, anddepending on the other terms of the offering memorandum, the fund manager could potentially haltredemptions entirely or not fully pay them out. Investors may want to inquire if their fund managersever established reserves for their funds- if so, when and why? It is also worth considering if a fundmanager replies that they have no intention of ever establishing reserves, but this is just boilerplatelanguage that their legal counsel made them put in - then perhaps an investor can have thislanguage removed from the offering memorandum altogether or limited in a side letter.Originally posted in the February 2012 edition of Corgentum Consultings Operational DueDiligence Insights.For More info@corgentum.comInformation | Blog | Twitter Feed Tel. 201-360-2430About Corgentum Consulting:Corgentum Consulting is a specialist consulting firm which performs operational due diligencereviews of fund managers. The firm works with investors including fund of funds, pensions,endowments, banks ultra-high net-worth individuals, and family offices to conduct the industrysmost comprehensive operational due diligence reviews. Corgentums work covers all fund strategiesglobally including hedge funds, private equity, real estate funds, and traditional funds. The firms solefocus on operational due diligence, veteran experience, innovative original research andfundamental bottom up approach to due diligence allows Corgentum to ensure that the firms clientsavoid unnecessary operational risks. Corgentum is headquartered at 26 Journal Square, Suite 1005in Jersey City, New Jersey, 07306. Phone 201-360-2430. For more information visit, or follow us on Twitter @Corgentum.