Hedge Fund Email Review: Compliance Dream or Nightmare?

Emails and IMs can be dangerous — litigators, regulators and compliance professionals all know this well — yet their use at hedge funds, sometimes in the most casual of ways, continues to expand exponentially. 

Most recently, we have seen the emails on display in The Children’s Investment Fund litigation related to its CSX investment in which Christopher Hohn, the fund’s manager, appears to  be grappling with rought markets and grasping for direction.  “I am not sure what to do now… We have a real credit crisis” was reportedly written by Mr. Hohn to a colleague.  Emails were also used to indict two Bear Stearns hedge fund managers.  In these, we see that their internal discussion on the ability of their funds to weather the markets is far bleaker than that disclosed to investors during the same time period.

From a compliance point of view, the procedure of retaining and reviewing email has been a double-edged sword. On the one hand, email review allows a bird’s-eye view into what’s happening at a fund, allowing swift and effective intervention if anything has gone wrong.  On the other hand, once the email is written, sent and retained by an archiving system… well, that particular email is here to stay, and the damage may well be irreversible, as we see from the two examples above.

As the use of emails and IM’s continue to increase, the oversight function needs to be particularly vigilant.  There is no substitute for swift and effective intervention and we wonder if these two cases would be at the point they are at today if there had been.