SEC Probing Hedge Fund “Side Letters”

Side letters, commonly used by hedge funds, give certain investors preferential terms — cheaper fees, shorter lock-ups — to incent them to invest in the funds. While they’re not illegal, there is an issue whether they’re being properly disclosed to all the funds’ investors. If not, a fund could be breaching its fiduciary duty to be fair and equitable to all investors. Investor-protection laws demand that all investors be treated equally, regardless of size.