Asked to Vote, Some Walk

Fund managers sometimes seek their clients’ consent for changes in fund governance or policies.  Often this is about routine matters such as the election of directors. But occasionally a manager wants to make a major change, for instance in fees or lock-up conditions, and asks investors to vote on the issue.

Investors have mixed reactions to such requests. Institutions typically have set procedures for voting but other investors do not and consider each vote separately. That can take time and resources. Some investors prefer not to cast votes at all; therefore they buy non-voting shares.

Others weigh the costs versus benefits of a proposed vote in order to decide whether to tackle it. But one investor says if a manager does something undesirable, most clients will vote with their feet in any case. They will exit.

In 2009, when many mangers refused to allow redemptions in the midst of the crisis, investors had little choice and it was not possible to exit. Responses varied. Stephen Feinberg’s Cerberus Capital, faced with heavy withdrawals, instituted a restructuring plan for the main hedge fund.

The plan transferred assets in Cerberus Partners to a special-purpose vehicle and allowed a management fee for this SPV. Though many wanted their money back, investors cast their votes in favor of the restructuring.  Cerberus is still unwinding the SPV, which may end up doing alright.

If a restructuring looks like the best option for preserving assets, it is likely to get clients’ agreement. But investors can have different preferences.

It seems that for managers, getting approval for a change makes for better relations with clients. Imposing a policy on investors without their vote raises the risk that they will get away as soon as they can. Clearly there are situations where a vote is useful.

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