Track record ownership

Investment managers want to make sure that their fund's performance history belongs to the firm, not to individual employees. When employees leave the company, managers don't want them taking credit for the fund's past performance at their new jobs.

To protect against this, investment managers typically include specific promises in their employment contracts. These promises, called covenants, prevent partners and employees from sharing or claiming credit for the fund's historical performance after they leave.

Investment managers also use a structural approach to strengthen their ownership claims. They set up decision-making so that no single person is solely responsible for investment choices. Instead, they use management committees where multiple people make investment decisions together. This structure makes it harder for any individual to later claim they were responsible for the fund's success under securities laws.

Most investment funds create detailed contract terms that establish firm ownership over all work-related materials. These agreements state clearly that the firm owns all intellectual property and work products that employees create during their employment.

The ownership covers a broad range of materials. This includes investment concepts, trading strategies, analytical processes, software programs, databases, valuation methods, and risk assessment tools. The firm claims ownership regardless of whether an employee developed these materials alone or working with others.

These contractual protections also extend to business methodologies, investment approaches, and any other assets related to the fund's operations or the investment adviser's business activities. When employees leave, they typically must return all firm property, including electronic files and documents. Alternatively, they must sign formal statements certifying that they have returned everything as part of their separation paperwork.

Investment managers often create organizational structures that make it harder for individuals to claim ownership of track records. They ensure that investment decisions go through committees rather than relying on single decision-makers.

By using management committees or investment committees, firms create a factual record showing that multiple people contributed to investment performance. This collaborative approach supports the legal argument that the track record belongs to the firm as a whole, not to any individual employee. This structure strengthens the firm's position when disputes arise about who deserves credit for past performance.

Track record ownership rules typically work alongside other restrictions that apply after employees leave. These additional restrictions include , , and . Together, these protect the firm's legitimate business interests, including proprietary information, client relationships, and performance history.

However, the enforceability of these provisions varies significantly depending on which state's laws apply. States take different policy approaches to these employment restrictions.

California has long opposed non-compete agreements as a matter of public policy. In January 2024, California strengthened this position through new legislation. The law now makes non-compete agreements unenforceable regardless of where the employment contract was originally signed. The legislation also gives employees the right to challenge these provisions in court.

New York has also moved toward restricting non-compete agreements through recent legislative changes. In contrast, other jurisdictions will enforce if they meet certain standards. These states require that the restrictions be reasonable in scope, duration, and design. The restrictions must protect legitimate business interests such as trade secrets or confidential client relationships. They also cannot create excessive hardship for departing employees.

When employees leave, investment managers commonly require them to return all firm property, including electronic information. Alternatively, if the departing employee signs a separation agreement, they must formally represent and warrant that they have returned all materials.

If someone violates these , including unauthorized use of track record information, serious consequences typically follow. The breach usually results in immediate termination of any ongoing payments the departing employee was scheduled to receive. These payments, called sunset payments, are often specified in partnership agreements and fund operating agreements.

Employment agreements may also provide that is forfeited if someone becomes a "bad leaver." Firms typically define bad leavers as individuals who depart voluntarily, get terminated for cause, or violate important contractual obligations.

Despite these contractual protections, track record ownership remains one of the most contentious issues when people leave hedge funds. Disputes often focus on several key questions: How much did the individual contribute to the fund's investment success? What documentation exists to support either side's claims? Can the actually be enforced under the relevant state's laws?

These ongoing disputes highlight why clear documentation and proactive governance structures are so important. Firms that establish their ownership rights from the very beginning of the employment relationship are better positioned to defend their claims later.