Conflicts of Interest between Prime Brokers and Hedge Funds Kate Wormald Oesa Limited

Prime Brokers Capital Introduction Prime Prime Broker Broker Direct investment MiscellaneousServices Stock loan Futures OTC ClearingCustody Repos Cash trading Administration

Hedge Fund Structure FeederFund MasterFund FeederFund CaymanManager InvestmentManager FSA registered Investors Investors

Relationship between Prime Broker and Hedge Fund MasterFund Prime Broker Administrator C ayman Manager Investment Manager

Reality Check Investment Manager Prime Broker

Conflicts Capital Introduction – PB introduces Investors to the Fund in return for what? Capital Introduction – PB introduces Investors to the Fund in return for what? Direct Investment by PB or an affiliate Direct Investment by PB or an affiliate Provision of Start Up services ranging from Tax advice, FSA applications, legal assistance, what next? Provision of Start Up services ranging from Tax advice, FSA applications, legal assistance, what next? Administration services Administration services Trading services Trading services

So what are the potential Conflicts Investors – Introduced to Fund but relationship is with the Investment Manager Investors – Introduced to Fund but relationship is with the Investment Manager Start Up services – Independence Start Up services – Independence Direct investment – conflict between commissions on trading side and returns Direct investment – conflict between commissions on trading side and returns PB documents protect PB charge assets how does this fit in with above PB documents protect PB charge assets how does this fit in with above Rights to sell at their discretion Rights to sell at their discretion Use of assets commingling Use of assets commingling

Compliance concerns Treating customers fairly - who is the customer Investor or Investment manager Treating customers fairly - who is the customer Investor or Investment manager Money Laundering – who is responsible Money Laundering – who is responsible Due Diligence – who is responsible Due Diligence – who is responsible COMC/MAD – STR COMC/MAD – STR Dealing Ahead Customer Dealing Ahead Customer Research and Conflicts and MAD disclosures Research and Conflicts and MAD disclosures

Legal Risk What if there is a problem with the Investment Manager? What if there is a problem with the Investment Manager? What if an Investor sues? What if an Investor sues? What if there is Money Laundering or COMC or other regulatory investigations? What if there is Money Laundering or COMC or other regulatory investigations?

Conclusion Caution is needed in offering ever increasing number of services Caution is needed in offering ever increasing number of services Chinese Walls Chinese Walls Different entities Different entities New regulation? New regulation?