One of the more interesting lawsuits we have seen in the hedge fund industry of late is the case brought by the principals of Veras, a hedge fund which was based in Houston, Texas, against the law firm Akin Gump Strauss Hauer & Feld. The principals allege that Akin Gump provided advice to Veras which enabled them to conclude that the strategy of late trading mutual funds was, in fact, a legal practice. The Veras funds were subsequently investigated by the New York attorney general's office and the Securities Exchange Commission, eventually paying some $36 million in penalties prior to shutting down.
Putting aside legal questions about mutual fund timing in general or this case in particular, what caught our eye was the fact that Veras' lawsuit claims damages of some $4.4 billion, not including, we note, punitive damages.
This case is clearly unique but it raises a very interesting due diligence question: what are the expectations of a hedge fund manager when starting a new fund? We imagine many managers are slightly less optimistic in autumn 2007 than they were in the spring, but is it nonetheless the case that the base line expectation of a successful firm is to generate wealth in excess of $1 billion for the founders?
We certainly see value in spending a great deal of time with a start up fund discussing the manager's business plan and aspirations. For the investment team, "getting rich" is probably not the best answer to why a manager wants to run a hedge fund. On our side of the fence, the aspiring billionaire should start from day 1 with a clear plan of how to build a well resourced business - without investment in operational systems and people, the firm will have severe growing pains long before everyone buys a Gulfstream.
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