Risky Business: Examining Current Issues in the Hedge Fund Industry


RISKY BUSINESS: EXAMINING CURRENT
ISSUES IN THE HEDGE FUND INDUSTRY

Every year, the Columbia Business Law Review chooses a
major business law topic as the subject of its Survey and
presents articles exploring relevant legal developments and
timely issues in the area. This year's Survey is dedicated to
current legal issues surrounding the hedge fund industry.
Hedge funds are lightly regulated investment vehicles that
have gained popularity in the private investment sector,
largely because of their potentially high rates of return.
According to recent financial data, the total value of assets
invested in hedge funds is nearing two trillion dollars, with
these funds currently accounting for 30% of both equity and
fixed income trading in the United States securities markets.
Because hedge funds are not as comprehensively regulated
as retail investment vehicles, they are able to engage in
highly leveraged transactions and risky investment
strategies, such as short selling and trading in derivatives.
These unique characteristics, as well as hedge funds'
expanding role in the equity and debt markets, present
unique and relevant issues for the business law community.

The first article, Empty Manipulation: Bankruptcy
Procedure Rule 2019 and Ownership Disclosure in Chapter
11 Cases, examines the unique risks hedge funds pose in the
context of bankruptcy claims trading. Comparing the
situation to conflicts of interest seen outside bankruptcy, the
article concludes that greater disclosure of bankruptcy
claims and interests is necessary to protect both investors
and Chapter 11 debtors.

The second article, Navigating the Safe Harbors: Two
Bright Line Rules to Assist Courts in Applying the
Stockbroker Defense and the Good Faith Defense, discusses
several issues that arise when a hedge fund files for
bankruptcy. The article focuses on two safe harbor
provisions typically invoked by financial counterparties
during this process and recommends two bright line rules



that will provide greater consistency and clarity for parties
seeking such protections.

The third article, Job Well Done: Preventing the Use of
Private Placement Life Insurance to Wrap Hedge Fund
Investments, analyzes the purchasing of private placement
life insurance contracts to avoid paying tax on gains from
hedge fund investments. The article argues that recent
rulings from the Internal Revenue Service and changes in
the tax regulations have efficiently curtailed widespread use
of private placement life insurance policies as a tax
avoidance mechanism.

The fourth article, Hedge Fund Activism: A New Hope for
the Market, explores the impact of hedge fund activism on
the market. The article concludes that the market is likely to
benefit from hedge fund activism by showing that the risk of
short termism, the most frequently mentioned concern, is
overstated.

The final article, Much Ado About Nothing: An Analysis
of the "Accredited Natural Person" Standard, analyzes
Proposed Rules 216 and 509, which would increase the
threshold natural persons must meet before investing
directly in hedge funds. The article concludes that the SEC's
justifications for adopting the "accredited natural person"
standard are unfounded and that the change would actually
harm the individuals excluded under the proposed
regulatory regime.

Kevin J. Coco
Peter S. Kim
Stephen D. Chu
Kuang-Wei Chueh
Matthew F. Gately
Survey Authors

Allison M. Snyder
Survey Editor

No. 2:6081 SURVEY