Public Plan Investments in Hedge Funds

Who’s the ‘client’?

Before you accept a public pension plan into your fund, make sure that there is no provision in the statute under which the plan was created that imposes a ‘fiduciary duty’ on anyone who advises the plan regarding its investments.

If there is such a provision, you must make certain that the trustees of the plan independently decide to invest in your fund and that you are not legally regarded as the maker of that investment decision for the plan.

You must also satisfy yourself that a ‘fiduciary duty’ is not statutorily imposed upon you in your capacity as the manager of a fund in which the plan has invested. If that were the case, you would find yourself in the untenable legal position of having to know the plan’s overall financial and investment situation and having to take it into account whenever you make an investment decision for the fund. You could not, for example, buy a security for the fund in which the plan had a concentrated position in an unrelated account. Nevertheless, that is exactly what owing a ‘fiduciary duty’ to a client would require of you under current law.

If a fund manager were deemed to owe such a ‘fiduciary duty’ to a public pension plan in its fund, not only would its risk of legal liability to that client increase appreciably, but the issue and effect of that liability would most likely be litigated in the public plan’s backyard and under its state law.