He also asks that managers not be able to suspend withdrawals for any reason, as is stipulated in some documents. Some documents say that a manager can stop redemptions if the firm deems them to be “impractical or prejudicial to the partners.” That language leaves clients open to fund managers who restrict withdrawals for their own benefit, rather than for the benefit of outside investors, according to Kerner.
Most agreements don’t even hold the managers to their own contracts, Kerner said. The standard wording says that a fund manager isn’t liable for losses unless they are the result of gross negligence, willful misconduct or the violation of a law. The clause should also include the “material breach of the limited partnership agreement” in the list of bad acts, he wrote.
Another provision Kerner wants remedied involves the way managers ask investors to vote on changes to their fund documents. When funds send out the materials to be voted on, they generally stipulate that if clients don’t respond within 20 days, their vote will be counted as a “yes.” Kerner said that at the very least, the time period should be extended and should be accompanied by multiple attempts by the fund to contact the investors to make sure they are aware of the vote.
Lawyers Resist
In the paper, Kerner discusses his own experience trying to get documents changed. In many instances, the investment managers said they weren’t even aware of the contents of their own documents. Nor are most investors, since he was often told that he was the first person to ever complain.
He regularly got push back from the firm’s lawyers, who told him that they wouldn’t change the documents because they were industry standard.
Kerner, who compares the common use of these provisions to the replication of a faulty gene, said the “flaws will remain as ‘market standard’ until enough investors balk and then the standard will shift as necessary to enable the sponsors to raise the investment capital that they seek.”
Druckenmiller shut his hedge-fund firm more than three years ago and now manages his own wealth through his Duquesne Family Office LLC.