When Hedge Fund Partnerships Get Ugly

A lawsuit between a hedge fund and the platform that helped establish its business is raising thorny questions about such partnerships, especially when times are tough.

David Liu and Stuart Lippman, who ran a mortgage-backed securities hedge fund as part of fund platform TIG Advisors, allege that TIG’s principals breached their fiduciary duty by launching a competing fund. The plaintiffs are seeking damages and $2 million in expenses that they say TIG charged them and which they allege violated their contract. 

The duo filed the lawsuit in October 2020 in New York State Supreme Court. The lawsuit was until recently under seal.

Before starting the fund, Liu was a highly ranked MBS research analyst who, while at UBS, predicted a downturn in the mortgage market before the financial crisis, as well as spending time at Merrill Lynch; Lippman ran proprietary trading in securitized products for the Royal Bank of Canada. In 2012, the two managers chose TIG to help them launch a mortgage-related hedge fund called the TIG Securitized Asset Fund. Among other things, the fund invested in commercial and residential mortgage-backed securities, asset-backed securities, and whole loans. (In contrast, the Romspen fund invests primarily in first lien commercial mortgages.)

According to court documents, Liu and Lippman had already put together a team before the deal with TIG. They also claim that UBS had given a “soft commitment to provide $50 million of day-one investment capital” and that the bank had “recommended to Liu and Lippman that they affiliate with a hedge fund platform.”

TIG, like similar firms, provided marketing, compliance, back-office support, office space, and other operational infrastructure to start-up managers. Their 2012 term sheet, which was finalized into an investment advisory agreement by the middle of 2013, stipulated a profit-sharing agreement where TIG Advisors received a cut of management and performance fees in exchange for providing services to Liu and Lippman. The agreement between Liu and Lippman and TIG Advisors was restructured in 2018. The defendants say the 2018 agreement requires conflicts to be resolved through arbitration. 

Five years later, Liu and Lippman allege that TIG principals Michael Tiedemann, Spiros Maliagros, and Michael Fastert started discussions to launch a competing fund, after which TIG liquidated the fund from Liu and Lippman. 

A spokesperson for TIG said, “These allegations are without merit and we will vigorously defend ourselves.”

With an initial $50 million from UBS and money from friends and family, the hedge fund returned more than five percent on a net basis in the last three months of 2012. The fund was $85 million by the end of 2012 and UBS invested $50 million more at the beginning of 2013, according to court documents. By the end of the year, the fund had more than $360 million and net returns of almost 20 percent, according to the lawsuit. In 2015, the fund was $960 million and had annualized returns on a net basis of more than 15 percent. 

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At the same time, according to court papers, TIG Advisors was “faltering.”

In 2012, TIG Advisors had seven other funds aside from TSAF. By 2015, the plaintiffs allege that all of the seven had failed except an arbitrage strategy. “Among those failures was that of a hedge fund into which TIG Advisors had invested a significant amount of its own capital, the loss of which the individual defendants desperately tried to prevent by dedicating a grossly disproportionate amount of TIG Advisors’ marketing budget to promoting the fund when it began to fail,” according to the court documents.

As a result, TIG Advisors wasn’t able to attract new managers, court documents allege. 

Liu and Lippman allege that the problems led to TIG Advisors shifting overhead…