Dividing hedge fund assets on divorce

When the court comes to determine how assets should be divided on divorce, the first stage is to ascertain what the assets are and how much they are worth. Some assets are relatively easy to value: cash, quoted investments, pensions, (potentially) real estate.  Others, less so.  The valuation of business interests in the context of divorce proceedings is a notoriously tricky and often controversial area and a spouse's stake in a hedge fund is no exception.  

In cases involving a hedge fund manager, it will be necessary to consider:

1. The value of any investment that spouse has made into the fund itself;
2. The intrinsic value of their stake in the hedge fund business; and
3. The income they receive from the fund, usually comprising salary and profits deriving from management and performance fees.

Taking each in turn:

1. In a straight forward 50/50 case, the non-fund manager spouse would have a prima facie claim to 50% of the value of any investment in the fund (albeit if they can be adequately compensated from assets outside the fund and a withdrawal of the fund manager's investment can be avoided, that is preferable);
2. The question of whether a spouse's stake in the hedge fund business itself has any intrinsic value over and above its net assets in which the other spouse can expect to share has been the topic of debate, particularly where there are "key man" provisions at play.  Placing a reliable value on such an interest presents a further challenge (see further below). There is limited case law on this issue.
3. If and to the extent that, following a division of the available capital, one spouse is not able to meet their income needs going forward, they would have a claim for spousal maintenance.  However, there is no entitlement to share post-separation income. 

We acted for the wife in the case reported as CG v DL [2023] EWFC 82 (25 May 2023) (bailii.org). The husband was the founder and 62.5% owner of a hedge fund set up during the marriage. Two experts sought to value the hedge fund business. They both agreed that, while it was unlikely any third party would be willing to purchase the business, the husband's stake was of significant value to him, having produced substantial profits over the years which could continue.  Such value was in part the product of marital endeavour and it would therefore be unfair for the husband solely to retain it without any compensation for the wife.  As it was impossible to ascribe a reliable value to the husband's interest, the judge decided that the wife should share in the husband's future profits to the tune of 17.5% (as well as any capital realisation received by him) for a further four years.  This was not deemed to be a sharing of post-separation income but rather a mechanism for the wife to receive her fair share of value created during the marriage.

The outcome to these sorts of cases is highly fact specific. Please contact a member of the Family team if you would like further information.