Custody Agreement
(Hedge Fund) (Custodian)

Summary

The Custody Agreement sets forth the terms on which the custodian is prepared to hold custody of a hedge fund's cash and securities. A hedge fund will need to select at least one bank or broker-dealer to act as custodian. The bank or broker-dealer will propose a form of service agreement (the Custody Agreement) describing the services to be offered and the fees received. As the custodian generally submits the initial draft of the custody agreement to the hedge fund, this template is relatively pro-custodian and would be negotiated with counsel for the hedge fund. This template includes practical guidance, drafting notes, and alternate clauses. The core service is the agreement to act as clearing agent to clear and settle the hedge fund's securities trades in an account maintained for the hedge fund by the bank or broker-dealer, along with basic reporting about transactions and account balances. The custodian will typically be exculpated for the misconduct of third parties, in particular local custodians or settlement agents, and will be indemnified by the hedge fund for the hedge fund's misrepresentations or breaches of the agreement. For additional hedge fund formation resources, see: • Hedge Fund and Its Offering: Drafting and Reviewing the Key Documentation • Articles of Association (Offshore Hedge Fund) (Cayman Islands) • Administration Agreement (Offshore Hedge Fund) (Cayman Islands) • Investment Management Agreement (Offshore Hedge Fund) • Memorandum of Association (Offshore Hedge Fund) (Cayman Islands) • Hedge Funds Structure and Organization