Trade errors can cause substantial harm to hedge fund managers and their investors. Such errors can, among other adverse consequences, undermine investors’ confidence in a manager’s trade execution capability, cause a manager to miss investment opportunities and divert investment and operating resources in the course of correcting errors. As such, managers, investors and regulators are theoretically aligned in their shared interest in avoiding trade errors. As a practical matter, however, there is no regulatory roadmap to best practices for trade error prevention, detection and remediation. SEC guidance has been sparse on this topic, and industry practice has largely filled the vacuum left by the dearth of authority.
Click here to read this article, the last in a three-part series, where I talk to The Hedge Fund Law Reportabout the allocation of losses and gains resulting from trade errors among a manager and its clients, limitations on the allocation of trade error losses, documentation of trade errors, whether managers can obtain insurance to cover losses resulting from trade errors and common mistakes managers make in handling trade errors.