Hedge fund track record portability is always a big issue. A manager will want to bring his track record with him and some people believe that the track record of a “fund” is better than the track record of a managed account. In furtherance of this, some managers may be tempted to use an old management entity as a fund by changing the name of the entity (and perhaps even the structure – i.e. LLC to LP). In this way the “fund” gets to keep a certain track record and also maintain that it has “been in business” for longer than it has.

There are a couple of pitfalls to this idea. First, in these instances the original entity was often not audited which means that when the fund is eventually audited the manager is going to have to pay a larger audit bill so that the auditor can get comfortable with the previous year’s activities (unless there was an earlier audit). Second, there is the risk that the company has some outstanding liabilities (or the potential, based on the managers past action, for a liability to arise based on previous conduct). The risk of these outstanding liabilities will probably need to be disclosed in the fund’s offering documents.

Whether or not this is even is necessary is debatable. Some people view that having one track record is better than having two track records. However, it seems to me like there is no real reason to go through the hassle and disclosure items. Generally, investors are going to look at past performance. While it is better to have a track record for the fund that is being sold, if that track record comes with a very long disclaimer attached, it would seem to me like this would defeat the purpose. In essence, the manager is trying to hide what must be disclaimed – that this “fund” really doesn’t have this long track record. I think that at the beginning of the relationship with an investors, whether individual or institutional, the manager is going to want to be as forthright as possible. In this case I believe it means that the manager should not change the name, should create a new entity, and explain that the track record represents a program that was run by the manager and is the same program which will be run by the fund.