How Advisers to Private Funds Can Prepare for Challenges and Opportunities in 2018: Tax Reform, Blockchain Technology and Alternative Fee Structures

One year into the Trump presidency, advisers to private funds are considerably better informed than they were a year ago about what policies and approaches to expect from the regulatory agencies charged with overseeing the financial sector. But while the legal and compliance sides of the industry settle in to the new normal, 2018 promises to present its own set of challenges and opportunities for private fund managers. The potential impact of the much-heralded Tax Cuts and Jobs Act (Tax Act) – in particular the nuances of the Tax Act’s treatment of carried interest – will continue to be the subject of extensive analysis. Advisers to private funds stand to benefit from an array of opportunities in the bold new field of blockchain technology, one of whose principal applications, bitcoin, surged spectacularly at the end of 2017. Moreover, the poor returns and outflows of capital that plagued hedge funds in 2016 have generally not been a distinguishing feature of 2017 and the new year, leaving open the question of whether advisers will continue to offer alternatives to the “2 and 20” fee structure. To shed light on these crucial market issues, the Hedge Fund Law Report interviewed John P. Broadhurst and James J. Frolik, two partners at Shartsis Friese in San Francisco who are on the front lines of advising managers on the impact of the Tax Act; the spread of blockchain technology and its lures and drawbacks for fund managers; and the trend of alternative fee structures and arrangements. This article presents their thoughts on the foregoing. For more on how blockchain is impacting the private funds industry, see “Private Fund Advisers and Service Providers Must Evolve Their Businesses to Keep Pace With Innovations in Technology, or Risk Becoming Obsolete” (Jan. 18, 2018).

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