We have an accounting rather than legal background, but have nonetheless read enough hedge fund offering documents to recognise when a few extra "legalise" words here and there push the pendulum further away from the investor and towards the manager.
We actually have a favorite phrase to describe this - "prospectus creep". We're always amazed that the well known legal firms can try their luck with a new clause and, six month later, what initially appeared aggressive has "stuck" and is now standard in pretty much all new offering documents.
As an occasional series, therefore, we thought we'd highlight some of the more amusing "weasel words" the observant can find in a hedge fund prospectus.
Starting out is fund organisational expenses. These are the formation costs which have been incurred even before the first shareholder arrives. They include, incidentally, the attorney's legal bill for drafting the offering document in the first place. We do find it slightly ironic - ahem - that the cost of all that legal effort to draft a tight, indemnified and completely disclaimed prospectus is paid by the investors themselves. Still, what can we do.
We suggest that investors check exactly what can be included in organisation expenses. Legal bills, costs of incorporating the fund, forming the partnership, registering with the Cayman Islands Monetary Authority - fair enough. Sometimes, though, things get sneaky - what about marketing expenses?!!? We are always pleased when the lawyers put this one in - this enables the manager to travel round the world to market to potential investors (whether or not they end up putting in money) and then capitalise those costs as part of organisational expenses. Nice work if you can get it.
More "prospectus creep" at a later date.