Dividing Hedge Fund Assets in Divorce

Hedge funds are an investment tool similar to a mutual fund, in which investors funds are pooled and invested into different financial instruments. Unlike mutual funds, most hedge funds are not regulated by the SEC. But they do require accredited investor status. This means that the investors must have annual net worth of more than $1,000,000, as well as having considerable investment knowledge.

So basically, a hedge fund is like a mutual fund for the super-wealthy. And like all divorces, splitting up the marital assets to reach an equitable distribution can lead to headaches and battles. Below are some tips for lawyers who may be handling a case involving a hedge fund:

What Family Attorneys Should Know Before Dividing Hedge Fund Assets

1. Understand your clients' rights to redeem his or her shares. If the hedge fund is open-ended, money can be withdrawn at specified intervals throughout the year. It's important to note that many hedge funds have a "lock-up" period after they are formed in which funds cannot be redeemed or sold, and this period may last for a year or more.

2. Know how a fund's assets are valued. Hedge funds are often a mix of publicly traded and closely held securities (some of which may be highly illiquid), which makes them difficult to value. Some valuations are based on the security's recent trading activity and the anticipated costs of the assets, both of which can vary wildly over time. Therefore, it's important to understand the valuation process for that specific fund and whether the fund's securities have been valued by independent sources.

3. Don't confuse Private Equity fund investments with hedge funds. Private equity investment funds "look" similar to hedge funds - investors must be accredited and owners generally receive a Form K-1 detailing income and capital gains. However, private equity fund capital and investment structure is very different. More importantly, the value listed for a fund on a brokerage statement may be very different than the actual value of the underlying assets due to conservative accounting policies followed by many funds.

4. Recognize the tax ramifications. Investors generally receive Form K-1 on or near the tax filing deadlines. As a result of the added complexity, there may be additional costs for tax return preparation. Also, know the tax treatment for earnings and the distribution rights, if any, to pay the resulting tax.

In high asset cases including a hedge fund, divorce settlement can be a more convoluted. The following articles can help you understand options for dividing other investment funds: