Is this the First Hedge Fund “Man Bites Dog” Story?

Hedge Funds, long the whipping boy for the financial ills of the country, are witnessing one of their own grow a spine. Last Wednesday, Davidson Kempner Capital Management LP, politely informed Kentucky Retirement Systems (KRS) to withdraw the $68 million it has invested with the firm.

Why?

According to the statement given to the Lexington Herald Leader by KRS executive director David Eager, the dust-up between Davidson Kempner Capital Management LP and the KRS revolves around two issues. The first, recent state legislation, specifically Senate Bill 2.

However, this Bill was signed into law March 10, 2017 and, although Senate Bill 2 undoubtedly has provisions unfavorable to Davidson Kempner Capital Management LP and the hedge fund industry as a whole, it is not credible that a law, which has been in force for 15 months, would suddenly become an impediment to Davidson Kempner Capital Management LP’s continued relationship with KRS. Eager’s suggestion that Senate Bill 2 is a reason for Davidson Kempner Capital Management LP’s decision impugns the competency of its Compliance Officer and legal counsel.

The second, and more believable reason, that KRS and Davidson Kempner Capital Management LP parted ways, is recent litigation that was filed against several other hedge fund firms in which KRS had invested around $1.5 billion.

But We’ve Seen this Before

While it is true that the hedge fund industry is no stranger to litigation, the lawsuit recently filed is a horse of a different color. This legal action was brought by 8 private citizens on behalf of the KRS. Counsel for the defendants in the case argue that these private citizens have no standing on which to file such a lawsuit.

It is far more likely that Davidson Kempner Capital Management LP’s decision was based upon the concern that the Kentucky courts will apparently allow lawsuits against hedge funds regardless of how tangentially said plaintiffs may be associated with KRS.

This is clearly an understandable concern for any hedge fund considering a relationship with KRS which manages one of the most underfunded public pension systems in the United States. Funding ratios for its 5 funds are reported to range from a low of 14 percent to a high of 54 percent. This is clearly dangerous territory for any investment firm because the state will never acknowledge the unfortunate situation to be its fault. Rarely is there a mea culpa from a government entity.

What about Hedge Fund Jobs?

This Kentucky tale highlights the importance of the legal profession in the hedge fund industry. It also demonstrates the very serious nature of a Compliance Officer’s duties and responsibilities in a hedge fund. Job opportunities for great legal minds will always be present in the hedge fund industry. With hedge fund starts outpacing hedge fund closures through 2018’s first quarter, demand continues to grow.

HFR reports that the industry saw 158 new funds launched through the first quarter, with 145 liquidating, a net gain of thirteen funds through the quarter. As a result, opportunities for employment in the industry remain robust.

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