A fund of hedge funds (“FoHF”) is an investment vehicle that offers its investors exposure to a portfolio of hedge funds selected by the investment manager of the fund. The investment manager uses his/her knowledge, diligence and expertise to select and manage the hedge fund portfolio, saving his/her investors from the need and the operational and resource commitments to do so. In implementing their investment strategy, FoHFs often utilize financing transactions for various purposes, among them to provide leverage and liquidity. Regardless of purpose, because these funds have no natural life span, the financing transactions typically remain in place for lengthy periods of time. And because of their relatively long durations, these transactions often require amendments to accommodate changes to the fund, transaction or structure of the pledged collateral. While many such amendments are routine in nature and may require limited legal analysis, amendments related to, or arising out of, certain changes to the structure of the fund or its investment portfolio present potential legal issues that should be considered in detail.
The hedge funds that comprise the investment portfolio of a FoHF typically offer liquidity only through redemptions, and these hedge funds have the ability to restrict redemptions upon certain events. During the 2008 financial crisis and the resultant reduction in the value and liquidity of investments in hedge funds generally2, many FoHFs were faced with investor redemption requests and often restricted or delayed access to their hedge fund investments (through to the implementation of gates or the suspension of redemptions). Among other things, the crisis highlighted the importance of financing transactions to FoHFs as a tool to manage their liquidity requirements—such transactions could be drawn upon to meet investor redemption requests if a FoHF was unable or reluctant to redeem its underlying hedge fund investments. As...