Jul. 2, 2020

Opportunities and Obstacles Presented by the Current Economic Climate

The coronavirus pandemic has put the global economy into a tailspin. As countries and cities imposed strict restrictions on the movements of their citizens, economic activity slowed considerably, causing worldwide economic retraction, including recessions in the U.S. and abroad. How long the current economic climate will last – and whether it will worsen – are open questions. As a result, some fund managers are fielding complaints from investors and considering whether it is time to close up their shops. The news, however, is not all bad. Although the current climate has presented obstacles for certain fund managers, such as high volumes of redemption requests, it has also presented investment opportunities for others. In fact, some hedge funds are actively fundraising, and various fund managers are looking to hire distressed debt experts to take advantage of the opportunities in the market. In that spirit, the Hedge Fund Law Report is highlighting five articles from its historical archives exploring topics related to those opportunities and obstacles, including navigating issues related to distressed debt investments; preparing for a potential economic downturn; handling investor complaints; assessing considerations for going private; and winding down a fund. Next week (the week starting July 6, 2020), the Hedge Fund Law Report will resume its normal weekly publication.

Investment Strategies, Considerations and Uncertainties of Distressed Debt Investments by Hedge Funds

The current economic climate has hit certain industries, such as retail, travel, entertainment and commercial real estate, particularly hard. Struggling companies may be looking for access to short-term capital or even long-term partnerships. Thus, the distress in which those companies find themselves presents opportunities for funds interested in investing in distressed debt. This article summarizes the key issues discussed in a seminar by BakerHostetler on distressed debt investments, including types and strategies of distressed investments; key legal issues relating to those investments; issues investors should consider when assessing distressed opportunities; and two relevant court cases. For more on distressed debt, see “Hedge Fund Managers Trading Distressed Debt Must Understand LMA Standard Form Documentation” (Feb. 25, 2016).

How Private Fund Managers Can Prepare for a Potential Downturn

According to a recent report by the World Bank, the coronavirus pandemic has triggered “the deepest global recession since World War II.” The report warns that the speed and depth with which the pandemic-related recession struck “suggests the possibility of a sluggish recovery” and that things may worsen before they begin to improve. Thus, fund managers cannot sit idle and wait to see what happens; rather, they need to take steps now to prepare for possible further downturns in the economy. In this guest article, Ira P. Kustin, partner at Paul Hastings, outlines various issues of which private fund managers must be aware in the event of potential economic downturns, including planning for withdrawal requests; implementing withdrawal suspensions; balancing fiduciary duties to the fund and its investors; and resolving a liquidity crisis. For additional commentary from Kustin, see “How Fund Managers May Address End-of-Life Issues in Closed-End Funds” (Jan. 17, 2019); and “Beyond the Master-Feeder: Managing Liquidity Demands in More Flexible Fund Structures” (May 25, 2017).

How Should Hedge Fund Managers Handle and Document Investor Complaints?

SEC Chair Jay Clayton stressed in an April 2, 2020, statement that investors remain front of mind at the SEC. At a special meeting of the Investor Advisory Committee held the same day, Clayton noted, “Our investors and our markets thirst for information as a general matter. This is particularly the case in times of economic shock and uncertainty.” As a result, investors may complain if they feel a fund manager is not being forthcoming about the status of the fund or communicating sufficiently with them. Investors may also complain for other reasons, such as if the manager suspends redemptions or withdrawals from the fund. Therefore, it is important that a fund manager have a plan for managing investor complaints. This article discusses what constitutes an investor complaint; who within the fund manager should receive those complaints; how investor complaints should be investigated and addressed; when to notify outside counsel of an investor complaint; how to determine the appropriate course of action, including whether, when and how to respond to complaints; and how to document a complaint. For more on communicating with investors, see “The Dos and Don’ts of Investor Calls That Investment Managers Must Consider” (May 7, 2020).

Going Private: Factors to Consider When Closing a Hedge Fund to Outside Investors

A hedge fund that is struggling in the current economy does not necessarily need to shut down completely. One alternative may be for the manager to close the fund to outside investors and convert into a “private structure,” such as a family office. The first article in this three-part series explores the “going private” trend and the factors a hedge fund manager should consider when deciding to convert a hedge fund, as well as the options available once that decision has been made. The second article examines the operational considerations a hedge fund manager faces when making the conversion, including ongoing regulatory obligations and staffing concerns. The third article details the mechanics for taking a hedge fund private, including redemption of outside investors and costs of conversion. For more on family offices, see “Benefits and Burdens for Hedge Fund Managers in Establishing or Converting to a Family Office” (Jun. 6, 2014),

Winding Down Funds: Practical Considerations for Managers When Liquidating Their Funds 

While some hedge funds are taking advantage of investment opportunities presented by the current economic climate, others have been compelled to close their doors. For example, hedge fund manager Solus Alternative Asset Management LP told investors in March that it was shutting down its flagship fund. Fund managers in a similar position may have no choice but to wind down their funds. So, how does that process work? In an interview with the Hedge Fund Law Report, Michael C. Neus, former senior fellow with the Program on Corporate Compliance and Enforcement at New York University School of Law and current GC/CCO of ExodusPoint Capital Management LP, shared his detailed insights about the various considerations caused by winding down a fund. The first article in this two-part series presents Neus’ thoughts on the factors leading to the decision to wind down a fund; which personnel should lead that process; and how it should be disclosed to investors and service providers. The second article explores what types of fees and expenses investors should be charged during the wind-down, as well as how managers can maximize the value of illiquid assets during a liquidation. For more on winding down funds, see “Practical Tips for Fund Managers to Mitigate Litigation Risk From Regulators, Investors and Vendors When Winding Down Funds” (Oct. 27, 2016).