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When Hedge Fund Partnerships Get Ugly

In a case that’s on appeal, mortgage hedge fund managers David Liu and Stuart Lippman allege TIG Advisors broke the promises of their original deal.

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 costs to them, without their approval, a practice they call “stuffing,” and which they learned about after they were paid. The charges included information technology consulting and bonuses for the marketing team. 

The plaintiffs also allege that the defendants withheld information in early 2017 about a redemption from a large investor in TSAF that was planned for the end of the year. By the time they found out, Liu and Lippman said it was too late to convince the investor to not withdraw their funds or to manage the redemption and mitigate losses to other investors. 

Liu and Lippman allege that the losses in 2017 as a result of the redemption led to diminished performance and yet another large redemption in April 2018. At the same time, a pension plan had a side-letter agreement that required TIG Advisors to notify them of any big redemptions by other investors or by UBS, one of the anchors. That failure “put the Funds and TIG Advisors in significant legal jeopardy. It also badly damaged TIG Advisors’ reputation in the investment community, and indirectly, by association, the reputations of Liu and Lippman,” according to the suit. 

In March 2018, the plaintiffs started talking to portfolio managers who specialized in agency mortgages about a joint venture. When Liu and Lippman brought the idea to TIG, they refused to engage about the potential of a venture, even though they had freely discussed similar arrangements in the past. 

“[T]he individual defendants were secretly planning to launch their own mortgage-asset-backed fund to compete with TASF,” according to the documents. 

In early 2018, TIG told Liu and Lippman that they were potentially investing in Romspen Investment Corp, a Canadian direct lending fund. In October, TIG announced an investment in Romspen, which would be funded by Kudu Investment Management. In the court documents, Liu and Lippman allege that the defendants failed to inform Kudu that they had hid redemptions when it was legally required to do so. (Kudu referred questions to TIG.) 

In January, TIG and Romspen launched the TIG/Romspen U.S. Mortgage fund. Liu and Lippman allege that the fund was registered with the Delaware Secretary of State in January 2017. The defendants also allege that TIG approached UBS and other investors in their fund to now invest in the Romspen fund. 

In 2019, TIG started shutting down TASF, including suspending redemptions and telling the plaintiffs to lay off their staff, “putting at risk hundreds of millions of dollars in assets that were still under management in the funds.” 

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