In the ongoing pursuit to generate alpha, some hedge fund managers have increased allocations to more illiquid assets. Many of these assets, however, are not suitable for traditional forms of financing, including short-term margin and repurchase agreement (repo) financing, and can only be financed through bespoke financing arrangements, including total return swap (TRS) financing, structured repo financing and special purpose vehicle/entity (SPV) financing. In this guest article, the second in a two-part series, Fabien Carruzzo and Daniel King, partner and associate, respectively, at Kramer Levin, review the main features of structured repo financing and SPV financing, and highlight the comparative advantages and disadvantages to private funds of using these structures, taking into consideration the flexibility of the structures, the complexity of the legal documentation of each structure and the level of asset protection afforded by each structure. The first article
provided an in-depth discussion of TRS financing. For analysis of another type of lending facility, see our three-part series on understanding subscription credit facilities: “Their Popularity and Usage Soar Despite Concerns Raised by Certain Members of the Private Funds Industry
” (Mar. 1, 2018); “Principal Advantages and Key Points to Negotiate in the Credit Agreement
” (Mar. 8, 2018); and “Key Concerns Raised by Investors and the SEC
” (Mar. 15, 2018). For additional insight from Carruzzo, see “New York Appellate Court Affirms Broad Rights of Parties in CDS Transactions to Pursue Their Economic Self-Interests, Despite Adverse Effect on Counterparties
” (Mar. 30, 2017).