While analyzing current trends within the industry, two areas in particular stand out: the increasing complexity of side letters and the increased reliance on 3rd party valuation firms for complex assets.

Side Letters:

Less costly than a new series or share classes, side letters are without question legitimate tools for raising capital. Assuming the terms are objective, achievable, clear and do not create embedded fiduciary conflicts under distressed scenarios, a well drafted side letter (when monitored properly), should not pose a significant governance or compliance problem.

However, perhaps in response to the fact that (standard) offering documents for hedge funds have not changed materially since the liquidity crisis (with respect to the rights and protections offered to investment managers as it pertains to issues like gating), it seems that both the complexity and reach of side letters has grown exponentially over the last 10 years.

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