It is a species that can be unpredictable, even dangerous. In a recent Wall Street Journal article, Peter Astleford from law firm Dechert LLP, warned that improper side letters are " the industry's ticking time bomb".While other industry participants, and their lawyers, have resigned themselves to the view that side letters are an inevitable, even necessary, part of the process of dealing with institutional investors and their specific needs, in fact many institutional investors and funds of hedge funds pride themselves on being able to extract more favourable terms from hedge funds by virtue of their size and their 'strategic importance' to any particular fund. The Cayman Island courts are currently considering an action concerning a side letter, one of the few to be judicially considered, which may in time provide useful guidance for the enforceability (or not) of side letter arrangements.What are the common terms of side letters and which ones are potentially problematic to hedge fund directors, general partners, investment managers and investors alike?Monitoring side letters with most favoured nation clauses can be particularly problematic and hedge funds and their investment managers must ensure that they do not enter into conflicting arrangements with different investors.Many side letters are not actively monitored on an on-going basis and the more side letters a fund enters in to, the greater the likelihood certain terms of those side letters conflict.Seemingly, not much.

The side letter is drafted by the Below are some of the reasons a hedge fund manager may use a side letter arrangementThere are many different ways which any of the above concepts can be implemented into the side letter and generally it will depend on the business points negotiated by the manager and the investor.

However, rather than forego making the investment in the hedge fund, the prospective investor, through the use of a side letter, may seek to limit the manager's strategy in one of four ways:Through the use of a side letter, an investor may require the hedge fund manager to reduce the incentive and management fees charged on their investment. Alternatives will obviously depend upon the individual circumstances. The side letter can also be used to try to get a current investor to contribute more assets to the fund.During the late part of 2007 and the early part of 2008, there was a lot of chatter within the hedge fund industry that the SEC would increase its investigation of hedge fund side letters.

Such amendments may include eliminating a lock-up, reducing the size of the hold-back (the term 'hold-back refers to a percentage of the amount redeemed which is not returned to the investor until after a specified period of time), or reducing the amount of time the investor is required to provide notice to the hedge fund in connection with a redemption.In the event that a hedge fund manager is principally owned or controlled by one (or more) key person(s), the fund's success will depend, in particular, on the skill and acumen of the key person(s). If you're happy with cookies click proceed. Indeed, in terms of their prevalence, it is generally acknowledged that most hedge funds probably have some sort of side letter arrangement with at least one investor.As one may expect, there are both legal and practical pitfalls in arrangements where particular investors are offered terms that are more favourable or additional to those offered to others. Fiduciaries to a hedge fund owe an identical obligation to each investor. The directors' resolution should recite in full the provisions in the offering memorandum and the articles that permit the creation of side letters, and explain why a subscription on the side letter's terms is in the fund's best interests.Side letters can be a useful tool in the hedge fund world. The facts of the case are that Headstart had invested in SV (a mutual fund in the British Virgin Islands) …