The uncorporate approach to poor earnings

Larry Ribstein —  25 October 2011

Yesterday’s WSJ reported that hedge funds are facing possible investor redemption demands:

As the year comes to a close, some investors say they are reviewing how their managers have performed through the recent volatility and are making decisions about whether to cash out of underperforming funds. Investors who want out before the end of the year in most cases need to give 45 or 60 days’ notice of their redemptions, setting up a critical period for managers who have suffered significant losses. * * *

Those funds’ managers “will be punished, and rightfully so,” said Vidak Radonjic of the Beryl Consulting Group LLC, which advises investors on hedge funds. * * *

“If they are having a bad year in that returns are down but can explain it in a way that convinces us they haven’t lost their discipline, then we might give them a pass,” said Sam Katzman, the chief investment officer of Constellation Wealth Advisors, which invests in hedge funds and has $4.5 billion under management. Constellation is likely to redeem from some managers who have underperformed this year, he said.

It might be a good idea if poorly performing corporations faced the same discipline. One might argue that it beats the vagaries and gaps in the business judgment rule and shareholder voting.

In fact, one did.

Larry Ribstein


Professor of Law, University of Illinois College of Law

2 responses to The uncorporate approach to poor earnings


    Actually, drawing the line is the focus of the linked article, which is why I linked that particular one. And, yes, tax rules are part of the explanation, though not the whole one. I don’t think the SEC is a villain in this particular case regarding choice of form.


    But, Larry, wouldn’t it be fair to mention that this uncorporate solution is unique to businesses which cannot efficiently be going back into the capital market every time they need long-term financing? I know that you have made the point before that the uncorporate form isn’t for everyone, but you rarely tell us where the line is. Perhaps the villain here is the SEC and the IRS more than the corporate form.