Forming a Hedge Fund

In the event that the investment assets of “benefit plan investors,” in the aggregate equal or exceed, at any time, twenty-five-percent (25%) of the aggregate equity of a hedge fund, the hedge fund manager will be deemed to be managing “plan assets” and thus, become a “plan fiduciary” under ERISA. As a fiduciary under ERISA, the hedge fund manager, in part, would be prohibited from participating in or entering into any transaction that would result in a conflict of interest with the benefit plan investors. Employee benefit plans, individual retirement accounts and Keogh accounts are some of the types of investors considered to be “benefit plan investors.”

Each time there is an investment or withdrawal in a hedge fund, the hedge fund manager or an agent of the manager is required to calculate the percentage of assets held by benefit plan investors in the aggregate. The value of the manager’s account(s) is not included in the calculation to determine the percentage of assets held by benefit plan investors in the aggregate. The reporting on this issue is commonly handled by the fund’s administrator.