One of the questions that is often posed to hedge fund managers revolves around the fair allocation of investment ideas to individual funds. If a manager has several funds with varying hurdle rates, performance fees, and management fees, then the manager may have an incentive to funnel her best trade ideas into the one with the most lucrative compensation framework. Add to this the fact that some of those funds might be under their high water mark and some may be home to a disproportionately large personal investment by the manager and investors can get very nervous. The result is often a requirement for a fixed, written policy on trade allocation between funds.

The same kind of conflicts can also exist when a hedge fund manager also manages a mutual fund. Last week we discussed the accelerating phenomenon of “convergence” between hedge funds and traditional long-only funds. We cited an FT article on the possible conflicts resulting from such a practice:

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