Goldman Sachs Upholds Investor Differences

Chidem Kurdas

A hedge fund investment vehicle managed by Goldman Sachs affirms the right to differentiate between groups of investors, either by issuing separate share classes or through side letters that grant favored terms.

Certain classes of investors may get better access to information or the right to redeem at shorter notice than others. They may be free of lock-ups and be allowed to redeem at times when other investors can’t.

In the past such privileges led to complaints from clients of unrelated funds, including complaints to regulators.  Redemption provisions in particular became a contentious issue in the 2008-.2009 crisis when many funds suspended withdrawals.

The Goldman Sachs vehicle is presumably protected legally by its up front disclosure of different terms. At the same time, investors are warned that the manager can grant additional favored terms without announcing that it is doing so. In particular, Goldman Sachs’ own employees and funds may get better terms.

The arrangement is not unique. Hedge funds have used side letters for years, though customers sometimes object. Share classes with different fees and liquidity provisions are common among mutual funds, which typically have institutional shares with better terms for large investors.

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