Member Article

The UK's Financial Services Authority (FSA) has issued a Feedback Statement on its discussion paper DP05/4 "Hedge funds: A discussion of risk and regulatory engagement" and has urged firms to focus on the risks posed by side letters "which will remain an area of supervisory focus". Side letters have become a common feature for institutional investors investing in hedge funds with the result that such investors receive preferential treatment and more information than other investors. The FSA expects managers to ensure that all investors understand that a side letter has been granted and that conflicts may arise. An industry working group has been established by the Alternative Investments Management Association to examine ways of reducing the use of side letters and is considering incorporating common issues into the funds' documentation.