Funds Hub

Money managers under the microscope

Gabbert spots side letters loophole

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Earlier this month we reported that the Hedge Fund Standards Board had voiced its concerns over the increased use of so-called “side letters” — preferential deals offered to some clients that could disadvantage others.

These ad-hoc deals are covered by best practice guidelines, although not formal rules, that were issued by AIMA in conjunction with the FSA. These say that managers should disclose terms that give some investors better access to their cash, although it seems that these guidelines may not always be followed to the letter by managers.

However, eagle-eyed lawyer Dale Gabbert of Reed Smith has spotted a potential loophole, which is particularly relevant now that many big hedge fund firms are opening offices in Switzerland or elsewhere and shifting the location of some functions such as fund management to cut their personal or corporate tax bills.

He explains: “One of the unintended side effects of firms moving their asset management function from London to reduce their tax burden will be that the AIMA guidance on Side Letters will no longer apply to them.

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