The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

Articles By Topic

By Topic: Fund Structures

  • From Vol. 11 No.46 (Nov. 22, 2018)

    How Fund Managers Can Navigate Establishing Parallel and Debt Funds in Luxembourg in the Shadow of Brexit and Proposed E.U. Delegation Rules

    The Association of the Luxembourg Fund Industry (ALFI) recently organized a seminar that examined different fund structures within Luxembourg, as well as political and regulatory developments within Europe. The seminar featured panel discussions with representatives from asset managers, in addition to financial services, legal and accounting firms. This article highlights the portions of the seminar addressing the establishment of parallel E.U. funds and Luxembourg debt funds; Brexit; and the E.U.’s proposed delegation rules. For additional coverage of the ALFI program, including a summary of the keynote address of H.E. Pierre Gramegna, Luxembourg’s Minister of Finance, along with the portions of the seminar that covered marketing funds in the E.U. and setting up an E.U. alternative investment fund manager, see “Luxembourg Remains a Significant Point of Entry for Non-E.U. Managers to Raise Capital in the E.U.” (May 17, 2018). For more on E.U. regulatory developments, see “With Brexit Looming and New Fund Structures Available, U.S. Hedge Fund Managers Face Risks and Opportunities for Marketing in Europe” (Jun. 9, 2016).

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  • From Vol. 11 No.44 (Nov. 8, 2018)

    Primer on Deal-by-Deal Funds: Balancing Deal Uncertainty Issues Against Attractive Carried Interest Opportunities (Part Three of Three)

    Uncertain investor funding can make sellers and lenders reluctant to engage with buyers employing a deal-by-deal fund structure, while also exposing sponsors to the risk of absorbing broken deal expenses. On the other hand, the unique treatment of carried interest – by not netting losing investments, in addition to immediately paying it upon selling an investment – presents undeniable upside that may make the risks worth enduring. Weighing these fiscal considerations, among others, against each other is part of the complicated calculus sponsors must perform when deciding whether to adopt the deal-by-deal fund structure. See “Structures and Characteristics of Activist Alternative Investment Funds” (Mar. 12, 2015). This three-part series aims to provide a holistic consideration of the features of the deal-by-deal structure. This final article analyzes the risks of deal uncertainty; ways sponsors can overcome those risks; and the unique management fee and carried interest treatments that can make the deal-by-deal structure a lucrative option to consider. The first article provided an overview of the deal-by-deal fund vehicle and detailed certain investor sentiments toward it. The second article described some of the challenges of the fundraising process, as well as important structural and mechanical considerations when establishing a deal-by-deal fund. See “Interest in Bespoke Fund Structures Surges As Markets Adjust to New Administration and Regulatory Regime” (Mar. 18, 2018).

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  • From Vol. 11 No.44 (Nov. 8, 2018)

    Pepper Hamilton Attorney Discusses Fundamental Structuring Issues for Investment Advisers: Taxation, Organizational Expenses, Redemptions, Publicly Traded Partnerships, Performance Fees and Alternative Structures (Part Two of Two)

    Pepper Hamilton partner Gregory J. Nowak recently examined in a presentation the key regulatory issues an investment adviser faces when developing its advisory business. This article, the second in a two-part series, summarizes the portions of the program that covered taxation issues, organizational expenses, redemptions, publicly traded partnership rules, performance fees and alternative fund structures. The first article covered separately managed accounts, adviser registration and the applicable federal securities laws. For further commentary from Nowak, see our two-part series on how hedge funds can protect their intellectual property: “Trademarks and Copyrights” (Feb. 23, 2017); and “Trade Secrets and Patents” (Mar. 9, 2017).

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  • From Vol. 11 No.43 (Nov. 1, 2018)

    Primer on Deal-by-Deal Funds: Key Fundraising and Structural Considerations When Establishing a Fund (Part Two of Three)

    To properly consider whether to adopt the deal-by-deal fund model, private equity sponsors must understand the pros and cons of operating the vehicle on an ongoing basis. While certain sponsors may be attracted to the streamlined structure of a deal-by-deal fund – i.e., a limited partnership set up as a single-asset fund with simple mechanics – others may be deterred by the continuous fundraising process, its impact on the scope of available investment opportunities and the activist role of investors. See “Anatomy of a Private Equity Fund Startup” (Jun. 22, 2017). This three-part series aims to familiarize fund managers with the deal-by-deal fund model by analyzing various issues to consider when evaluating the viability of the structure. This second article describes unique characteristics of the fundraising process and the general process of establishing a deal-by-deal fund, including specific rights bestowed upon investors in the fund documents. The first article outlined the basic characteristics of deal-by-deal funds and analyzed investor perceptions of the vehicle. The third article will explore the economics of a deal-by-deal fund, including unique treatment of carried interest and broken deal fees, as well as several approaches to overcoming the issue of deal uncertainty. For more on the co-investment structure, which has similar features to deal-by-deal funds, see “Sadis & Goldberg Seminar Highlights the Ample Fundraising and Co-Investment Opportunities in the Private Equity Industry, Along With Attendant Deal Flow and Fee Structure Issues” (Dec. 8, 2016).

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  • From Vol. 11 No.41 (Oct. 18, 2018)

    Primer on Deal-by-Deal Funds: An Overview of the Structure and Investor Perceptions Toward It (Part One of Three)

    In recent years, the alternative investment industry has subtly evolved to suit the varying needs of investors and sponsors alike. While sponsors have sought flexible vehicles with minimal barriers to entry that reduce costs and increase profits, investors have desired more active roles in the allocation and management of fund investments. See “Beyond the Master-Feeder: Managing Liquidity Demands in More Flexible Fund Structures” (May 25, 2017). Conveniently positioned to satisfy each of these demands, the deal-by-deal fund structure – in which a dedicated vehicle is created to make an investment in a single target opportunity – has become increasingly popular among private equity sponsors and investors. This three-part series provides an overview of the different features of, and important considerations when adopting, the deal-by-deal structure. This first article provides a basic overview of deal-by-deal funds, as well as an exploration of how investors perceive the structure. The second article will describe the rolling fundraising process; analyze how the vehicle differs from the traditional private equity approach; and outline its structure, along with key provisions to protect investors and sponsors. The third article will address the issue of deal uncertainty and how some sponsors overcome it, as well as how various fees and expenses are handled in the deal-by-deal fund model. For additional information about private equity fund structures, see “Interest in Bespoke Fund Structures Surges As Markets Adjust to New Administration and Regulatory Regime” (Mar. 8, 2018).

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  • From Vol. 11 No.41 (Oct. 18, 2018)

    Pepper Hamilton Attorney Discusses Fundamental Structuring Issues for Investment Advisers: Separately Managed Accounts, Registration and Securities Laws (Part One of Two)

    A recent Pepper Hamilton program featuring partner Gregory J. Nowak looked at the key regulatory issues an investment adviser faces when developing its advisory business. This article, the first in a two-part series, summarizes the portions of the program that covered separately managed accounts, adviser registration and the applicable federal securities laws. The second article will cover taxation issues, organizational expenses, redemptions, publicly traded partnership rules, performance fees and alternative fund structures. For additional commentary from Nowak, see “Blockchain and the Private Funds Industry: Potential Impediments to Its Eventual Adoption (Part Three of Three)” (Jun. 15, 2017); and “Three Approaches to Valuing Fund Assets and How Auditors Review Those Valuations” (May 11, 2017).

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  • From Vol. 11 No.29 (Jul. 19, 2018)

    Ropes & Gray Survey and Forum Consider Credit Fund Structures, Leverage, Conflicts of Interest and Challenging Environment (Part One of Two)

    Ropes & Gray recently hosted a program presenting the results of a survey of 100 credit fund managers that it conducted in cooperation with Debtwire. In addition to discussing the results of the survey, the webinar, featuring Ropes & Gray partners James R. Brown, Eva Ciko Carman, Alyson Brooke Gal and Jessica Taylor O’Mary, presented key takeaways from the Ropes & Gray Credit Funds Forum, which took place on May 16, 2018. This two-part series summarizes the report’s findings and the speakers’ insights. This first article discusses the types of credit strategies offered by the survey participants, challenges currently facing credit funds and the types of fund structures adopted by credit fund managers – including “season and sell” structures, treaty funds, business development companies and blockers – when engaging in a direct lending strategy. The second article will examine a variety of conflicts of interest that frequently arise for credit managers, the forms of leverage these managers are using, the types of issues that investors subject to the Employee Retirement Income Security Act of 1974 raise for credit managers and specific issues that arise for these managers when being examined by the SEC. See our three-part series on private funds as direct lenders: “Tax Considerations for Hedge Funds Pursuing Direct Lending Strategies” (Sep. 22, 2016); “Structures to Manage the U.S. Trade or Business Risk to Foreign Investors” (Sep. 29, 2016); and “Regulatory Considerations of Direct Lending and a Review of Fund Investment Terms” (Oct. 6, 2016).

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  • From Vol. 11 No.26 (Jun. 28, 2018)

    K&L Gates Program Discusses the Ins and Outs of Global Fundraising for Fund Managers: The Asia-Pacific Region (Part Two of Two)

    There are more opportunities and methods to access investment opportunities in the People’s Republic of China than ever before; however, choosing the correct platform to access the Chinese market is key. This and other points were explored in a recent program hosted by K&L Gates, which was moderated by K&L Gates partner C. Todd Gibson and featured partners Natalie R. Boyd, Michelle Moran, Dr. Hilger von Livonius, Choo Lye Tan and Matthew J. Watts. This article, the second in a two-part series, discusses the new Asia Region Funds Passport, the Australian Collective Investment Vehicle, the available means to invest directly in securities in China and ways Asian securities authorities are regulating cryptocurrencies. The first article reviewed pending proposals to streamline cross-border fund marketing in the E.U.; the impact on fundraising of Brexit and the recast Markets in Financial Instruments Directive; and the challenges of marketing in the Middle East. For additional discussions of fundraising in China, see “New Rule Offers Managers a Way to Raise Capital in China” (Apr. 13, 2017); and “How Private Fund Managers Can Access Investor Capital in Hong Kong and China: An Interview With Mayer Brown’s Robert Woll” (Feb. 23, 2017).

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  • From Vol. 11 No.24 (Jun. 14, 2018)

    How Fund Managers Can Navigate Establishing Parallel and Debt Funds in Luxembourg in the Shadow of Brexit and Proposed E.U. Delegation Rules

    The Association of the Luxembourg Fund Industry (ALFI) recently organized a seminar that examined different fund structures within Luxembourg, as well as political and regulatory developments within Europe. The seminar featured panel discussions with representatives from asset managers, in addition to financial services, legal and accounting firms. This article highlights the portions of the seminar addressing the establishment of parallel E.U. funds and Luxembourg debt funds; Brexit; and the E.U.’s proposed delegation rules. For additional coverage of the ALFI program, including a summary of the keynote address of H.E. Pierre Gramegna, Luxembourg’s Minister of Finance, along with the portions of the seminar that covered marketing funds in the E.U. and setting up an E.U. alternative investment fund manager, see “Luxembourg Remains a Significant Point of Entry for Non-E.U. Managers to Raise Capital in the E.U.” (May 17, 2018). For more on E.U. regulatory developments, see “With Brexit Looming and New Fund Structures Available, U.S. Hedge Fund Managers Face Risks and Opportunities for Marketing in Europe” (Jun. 9, 2016).

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  • From Vol. 11 No.16 (Apr. 19, 2018)

    Program Highlights Malta’s Fund-Friendly Environment

    A recent program sponsored by FinanceMalta – a public-private venture promoting Malta as a financial center – provided an overview of private fund formation in Malta; the advantages of domiciling funds and managers there; the nation’s regulatory and tax regimes; and its emerging approach to blockchain and cryptocurrency. Thalius Hecksher, global director at TridentTrust, moderated the discussion, which featured Chris Casapinta, executive director of Alter Domus; Adam de Domenico, founder and CEO of Cordium Malta; James Farrugia, partner at GANADO Advocates; Ivan Grech, a representative of FinanceMalta; and Christopher Portelli, associate partner at EY Malta. This article highlights the key points raised by the panelists. For additional commentary from FinanceMalta, see “What Malta Can Offer the Hedge Fund Industry: An Interview With the Chairman of FinanceMalta” (Jan. 26, 2017).

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  • From Vol. 11 No.16 (Apr. 19, 2018)

    Study Charts Rise of Non-Equity Funds and Related Founder Share Classes

    New hedge funds employing equity strategies decreased significantly in 2017 while non-equity funds surged. In addition, the number of non-equity funds that offered founder share classes more than doubled from the amount seen in 2016. These trends – along with others relating to fund fees, liquidity, structures and seeding – were tracked by Seward & Kissel (S&K) in its annual study of hedge funds launched by new U.S.-based manager clients in 2017. This article presents the key takeaways from the study together with insights from Steve Nadel, partner in S&K’s investment management practice and lead author of the study. For coverage of previous editions of S&K’s annual study, see: 2016 Study (Mar. 23, 2017); 2015 Study (Mar. 31, 2016); 2014 Study (Mar. 5, 2015); 2012 Study (Apr. 11, 2013); and 2011 Study (Feb. 23, 2012).

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  • From Vol. 11 No.10 (Mar. 8, 2018)

    Interest in Bespoke Fund Structures Surges As Markets Adjust to New Administration and Regulatory Regime

    A little more than a year into the Trump administration, the private funds market displays growing levels of innovation and experimentation. Fund managers are increasingly opting to employ bespoke fund structures, such as first loss capital arrangements, each of which has its own unique set of advantages as well as potentially catastrophic liabilities. Recent changes at the regulatory level – including the newly effective revisions to Form ADV; a heightened regulatory focus on blockchain and the fiduciary responsibilities of legal professionals providing related advice; and a growing emphasis on individual liability, particularly with respect to chief compliance officers – add to the environment’s complexity and may sometimes appear contrary to the administration’s pro-business rhetoric. These factors and trends make the 2018 private funds environment drastically different from that under the previous administration, raising exhilarating and daunting possibilities for fund managers. To help readers understand the unique benefits and potential drawbacks of some of the more popular bespoke fund structures, The Hedge Fund Law Report recently interviewed Peter Bilfield, partner at Day Pitney with experience in this area. This article presents his thoughts. For further commentary from Bilfield, see “What Do the Investor Advisory Committee’s Recommendations Mean for the Future of Marketing of Hedge Funds to Natural Persons?” (Oct. 24, 2014); and “Investments by Family Offices in Hedge Funds Through Variable Insurance Policies: Tax-Advantaged Structures, Diversification and Investor Control Rules and Restructuring Strategies (Part One of Two)” (Apr. 1, 2011).

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  • From Vol. 11 No.9 (Mar. 1, 2018)

    Understanding Subscription Credit Facilities: Their Popularity and Usage Soar Despite Concerns Raised by Certain Members of the Private Funds Industry (Part One of Three)

    With estimates that dry powder in private equity now exceeds $1 trillion, there can be no doubt that managers are fiercely competing for the best investment opportunities and that a manager’s inability to close quickly on investment deals may put it at a competitive disadvantage. Although many private funds have sizeable amounts of uncalled capital from their limited partners, that capital may only be accessible following a notice period of 10 business days or more. Subscription credit facility products were created as a form of bridge financing for private funds that employ a capital call structure. Credit lines of this nature have, however, come under intense scrutiny over the past 24 months, with one economist even calling these facilities a “con” used to artificially boost funds’ internal rates of return (IRRs). In this three-part series, The Hedge Fund Law Report examines these lending facilities and the controversies surrounding their use. This first article provides background on the types of funds that frequently use these facilities, recent trends that have emerged regarding this form of financing, basic mechanics of how these facilities are structured and the types of lenders that routinely offer these products. The second article will discuss the primary advantages to funds and their sponsors, as well as investors, of using these facilities and explore the legal documents that govern these facilities. The third article will evaluate some of the concerns raised by members of the private equity industry regarding these facilities, including the debate as to whether these facilities should be used for longer-term financing and how they impact a fund’s IRR. For more on subscription credit facilities, see “Subscription Facilities Provide Funds With Needed Liquidity but Require Advance Planning by Managers (Part One of Three)” (Jun. 2, 2016).

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  • From Vol. 11 No.5 (Feb. 1, 2018)

    New Tax Law Carries Implications for Private Funds

    On December 22, 2017, President Trump signed H.R. 1, the Tax Cuts and Jobs Act (Tax Act), into law. The Tax Act makes the most significant revisions to the Internal Revenue Code (IRC) since the 1986 tax reform. A recent Proskauer program offered an overview of the provisions of the Tax Act most likely to affect private fund managers. The program featured Proskauer partners Arnold P. May and Amanda H. Nussbaum, along with senior counsel Brian D. Huber and Marguerite R. Lombardo. This article highlights the key takeaways from their presentation. For coverage of another recent tax development, see our two-part series on how the new partnership audit regulations affect private funds: “Understanding the BBA and Appointing a Partnership Representative” (Oct. 19, 2017); and “Imputed Underpayments, Push-Out Elections and Fund Document Provisions to Amend” (Nov. 2, 2017).

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  • From Vol. 11 No.2 (Jan. 11, 2018)

    Annual Walkers Fundamentals Seminar Highlights Trends in Investor Sentiment, Governance, Side Letters, Fund Structures, Investment Vehicles and Restructurings

    While the hedge fund industry has generally rebounded from a dismal 2016 with improved performance and net inflows, not all hedge funds have benefitted equally. Investors continue to apply pressure on and shape how hedge fund managers structure their funds and negotiate with investors. A panel at the recent 10th annual Walkers Fundamentals Hedge Fund Seminar hosted by Walkers Global in New York City addressed, among other things, investor sentiment; developments and trends in the use of independent directors, side letters, fund structures and investment vehicles; and fund restructurings. Walkers partner Ashley Gunning introduced the panel, which featured partners Tim Buckley and Rolf Lindsay. This article summarizes the key points presented by the panelists. For coverage of the Walkers Fundamentals Hedge Fund Seminar from prior years, see: 2016 Seminar; 2015 Seminar; 2014 Seminar; 2013 Seminar; 2012 Seminar; 2011 Seminar; and 2009 Seminar.

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  • From Vol. 10 No.48 (Dec. 7, 2017)

    BVI Limited Partnership Act Unites Flexible Features of Different Jurisdictions’ Regulatory Frameworks

    One way a jurisdiction may seek to attract private fund managers and increase its standing as an offshore investment haven is by diversifying its stable of available corporate structures. See “Ireland Further Opens the Door for Loan Origination in Europe by Relaxing Restrictions on Eligible Investments by Certain Irish Funds” (Jan. 19, 2017); “New Luxembourg RAIF Structure Offers Marketing Options and Tax Benefits for Non-E.U. Hedge Fund Managers (Part Two of Two)” (Apr. 28, 2016); and “New Cayman Islands LLC Structure Offers Flexibility to Hedge Fund Managers” (Mar. 10, 2016). The British Virgin Islands (BVI) has recently joined this trend, with the crafting of a bill for the formation of a new and improved limited partnership. The Limited Partnership Act includes a clearly codified role for registered agents, along with safe harbor provisions allowing limited partners to obtain critically important investment data and take other actions to safeguard their interests without endangering their limited liability status. The Hedge Fund Law Report recently interviewed Robert Briant, partner at Conyers Dill Pearman and one of the authors of the act. This article presents Briant’s insights into the limited partnership structure, including its distinguishing features; the envisioned use of the vehicle by hedge and private equity funds; and ways the limited partnership is likely to fit into the international funds market as a whole. For more on the BVI, see “Advantages and Drawbacks of Four Main Fund Structures for Offshore Launches in the BVI” (Apr. 27, 2017); and “Use by Private Fund Managers of the British Virgin Islands for Private Equity Fund Formation and Private Equity Investments” (Nov. 29, 2012).

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  • From Vol. 10 No.47 (Nov. 30, 2017)

    The Effect of 2017 Tax Developments on Advisers to Private Funds: New Partnership Audit Rules, Tax Reform, Blockers, Discounted Gifting, Fee Waivers and State Nexus Issues

    A recent panel at the ninth annual RSM Investment Industry Summit offered insights into a number of pending tax issues of interest to private fund managers, including the revised partnership audit regime; tax reform; potential benefits of foreign blockers; discounted gifting; IRS regulation and enforcement around private equity fee waivers; and evolving concepts of state tax nexus rules. The program was moderated by RSM tax partner Gennaro (Jerry) Musi and featured tax partner Moshe Metzger and senior tax managers Ashima Arora and Richard Joslin. This article summarizes the portions of the presentation most relevant to private fund managers. For additional commentary from RSM personnel, see “Investor Gatekeepers Advise Emerging Managers on How to Stand Out When Pitching and Marketing Their Funds” (Dec. 15, 2016); “How Investment Managers Can Advertise Sub-Adviser Performance Without Violating SEC Rules” (Dec. 1, 2016); and “HFA Symposium Offers Perspectives From Cybersecurity Industry Professionals on Preparedness, Vendor Management, Cyber Insurance and Cloud Services” (Jul. 7, 2016).

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  • From Vol. 10 No.35 (Sep. 7, 2017)

    CIMA Regulator Discusses Key Issues for Advisers That Manage Cayman Funds: AML, Fund Governance and the Cayman LLC (Part One of Two)

    Offshore funds play an integral role in most private fund structures. Foreign investors appreciate the anonymity that these vehicles provide from U.S. tax authorities, while U.S. tax-exempt investors often prefer offshore corporate vehicles to shield them from receiving Unrelated Business Taxable Income. As the preferred offshore fund venue, the views and actions of the regulators in the Cayman Islands significantly impact most U.S. managers. In a recent interview with The Hedge Fund Law Report, Garth Ebanks, Deputy Head of the Investments and Securities Division at the Cayman Islands Monetary Authority (the Authority), provided his insights on the most salient issues from the perspective of a local Cayman regulator. This first article in our two-part series provides Ebanks’ thoughts into how managers are using the much-anticipated Cayman Islands limited liability company structure; how the Authority approaches the regulation of different types of private funds and other fund governance issues; and common deficiencies by private funds identified by the Authority concerning anti-money laundering and other applicable supervisory regulations. In the second installment, Ebanks will discuss the steps being taken by the Authority to ensure that Cayman vehicles are well positioned to obtain a marketing passport under the Alternative Investment Fund Managers Directive; three important regulatory initiatives being pursued by the Authority; the new Cayman Islands whistleblower law; and how the Cayman Islands has remained competitive as an offshore funds jurisdiction despite an onslaught of competition. For additional commentary from Ebanks, see our two-part series highlighting the views of U.S., U.K. and offshore regulators: “Best Ways for Hedge Fund Managers to Approach Regulation” (May 12, 2016); and “Cybersecurity, AML, AIFMD, Advertising and Liquidity Issues Affecting Hedge Fund Managers” (May 19, 2016). For more on offshore funds, see “Offshore Fund Vehicles: Do U.S. Investment Managers Need Them?” (Feb. 4, 2010).

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  • From Vol. 10 No.32 (Aug. 10, 2017)

    Are Fund Platforms Truly a Turnkey Solution? Considerations When Selecting and Negotiating With a Platform Provider (Part Three of Three)

    The Alternative Investment Fund Managers Directive regime has increased the frequency with which U.S. fund managers are using sub-funds on an umbrella fund platform (Fund Platform) to market to E.U. investors. This trend has coincided with a proliferation of Fund Platform providers and broader range of terms to negotiate. Consequently, U.S. fund managers need to parse the various features offered by Fund Platform providers and build appropriate protections into their onboarding agreements in order to realize the benefits of this fund structure. This three-part series seeks to familiarize U.S. fund managers with Fund Platforms by analyzing issues to consider when evaluating the structure’s viability. This third article addresses attributes U.S. fund managers should consider when selecting a Fund Platform, as well as key protections to include in the onboarding documents. The first article provided a primer about Fund Platforms relative to other structures and ways that managers can “Brexit-proof” their use of the vehicle. The second article presented pros and cons of operating on Fund Platforms that U.S. fund managers can weigh when determining whether to adopt the structure. See “Beyond the Master-Feeder: Managing Liquidity Demands in More Flexible Fund Structures” (May 25, 2017). For more on marketing in the E.U., see “Six Common Misconceptions U.S. Fund Managers Have About Marketing in Europe” (Mar. 9, 2017); and “Leading Law Firms Discuss Hedge Fund Marketing and Distribution Opportunities in a Post-Brexit World (Part Two of Two)” (Jul. 14, 2016).

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  • From Vol. 10 No.32 (Aug. 10, 2017)

    Opportunities Abound for U.S. Managers As European Regulators Relax Restrictions on Alternative Lending

    Regulations enacted in the aftermath of the 2008 global financial crisis required banks in the U.S. and abroad to curb their lending practices, forcing small and middle-market companies to search for alternative forms of financing to manage and expand their businesses. These events spurred the growth of alternative lending, where non-banking institutions were eager to fill the credit void left from the retrenchment of banks. Although alternative lending has flourished in the U.S., the sector has taken longer to develop in Europe due to the web of local regulations that govern loan origination by non-bank lenders. Europe’s view and approach to non-bank lending, however, has begun to evolve, creating new opportunities for lenders, their investors and borrowers. To help our readers understand the rise of alternative lending in Europe and how U.S. managers can access lending opportunities in Europe, The Hedge Fund Law Report interviewed Jiří Król, deputy chief executive officer and global head of government affairs at The Alternative Investment Management Associated Limited, which is affiliated with the Alternative Credit Counsel. For more on hedge funds as direct lenders, see our three-part series: “Tax Considerations for Hedge Funds Pursuing Direct Lending Strategies” (Sep. 22, 2016); “Structures to Manage the U.S. Trade or Business Risk to Foreign Investors” (Sep. 29, 2016); and “Regulatory Considerations of Direct Lending and a Review of Fund Investment Terms” (Oct. 6, 2016).

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  • From Vol. 10 No.31 (Aug. 3, 2017)

    Are Fund Platforms Truly a Turnkey Solution? Pros and Cons of Using the Structure to Market to E.U. Investors (Part Two of Three)

    At first glance, creating a sub-fund on an umbrella fund platform (Fund Platform) operated by a third-party management company (ManCo) seems like an ideal way for a U.S. fund manager to access E.U. investors. In addition to the risk-management and regulatory expertise conferred by the ManCo as the Fund Platform’s alternative investment fund manager, the economies of scale of this approach can reduce costs and rapidly accelerate the manager’s time to market. It is essential, however, for fund managers to balance these benefits against some of the potential disadvantages of this approach, including a lack of control, various conflicts with the ManCo and negative investor perceptions. To aid U.S. fund managers in determining whether Fund Platforms provide the optimal method for marketing to E.U. investors, this three-part series critically considers the structure from an array of vantage points. This second article in the series provides contrasting advantages and disadvantages for fund managers to weigh when deciding whether to use a Fund Platform. The first article offered an overview of the mechanics of Fund Platforms and explored how to mitigate obstacles caused by Brexit while using the structure. The third article will detail various factors for fund managers to consider when selecting platform providers and negotiating onboarding agreements. See also “Strategies for U.S. Hedge Fund Managers Looking to Outsource the Risk and Reporting Requirements of the AIFMD While Focusing on Capital Raising in Europe” (Aug. 1, 2014); and “Risks Faced by Hedge Fund Managers That Access the Alternative Mutual Fund Market Via Turnkey Platforms” (Mar. 13, 2014).

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  • From Vol. 10 No.30 (Jul. 27, 2017)

    Are Fund Platforms Truly a Turnkey Solution? Mechanics for Marketing in the E.U. and Mitigating Brexit’s Impact (Part One of Three)

    In addition to encountering regulatory obstacles, U.S. fund managers looking to access E.U. investors must also confront the high cost of establishing E.U. fund operations. In response to this issue, establishing a sub-fund on an umbrella fund platform (Fund Platform) created and run by a third-party management company has recently flourished based on its promise of being a “turnkey solution” to these problems. While the ease and access provided by the Fund Platform structure makes it a very tempting solution relative to others in the E.U., it is a path that is also fraught with potential peril if improperly understood and navigated. To assist U.S. fund managers in overcoming these barriers, this three-part series will weigh the merits of the Fund Platform structure and key considerations for managers to balance when choosing between platform providers. This first article provides an overview of the Fund Platform structure relative to alternative options and describes how fund managers can employ Fund Platforms to overcome obstacles caused by Brexit. The second article in this series will detail the advantages and disadvantages of adopting this fund structure for marketing in the E.U. The third article will explore key considerations for fund managers when selecting a Fund Platform provider and negotiating the corresponding onboarding documents. See “FCA Report Explores the Impact of Platforms, Governing Bodies and Manager Compensation Structures on Fund Competition (Part One of Two)” (Apr. 6, 2017); and “Passports, Platforms and Private Placement: Options for Marketing Funds in Europe in the Post-AIFMD Era” (Apr. 30, 2015).

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  • From Vol. 10 No.25 (Jun. 22, 2017)

    Canadian “Alternative Funds” Proposal Would Offer Hedge Fund Managers Access to Retail Investor Market

    Securities regulation in Canada, including the regulation of mutual fund products, is the responsibility of each individual province and territory. Offering a mutual fund product in Canada, therefore, may require compliance with multiple regulatory schemes administered by different authorities. Over the past several years, the Canadian Securities Administrators (CSA) have implemented a modernization project for mutual funds that are prospectus qualified and offered to the retail public (conventional mutual funds). In September 2016, the CSA issued a request for comment regarding a proposal to create a new regulatory framework pursuant to which “Alternative Funds” can be offered broadly to retail investors. In a guest article, Norton Rose Fulbright partners Michael Bunn and Mark A. Convery describe how the proposal would transform the Canadian market by expanding the investments and strategies that may be pursued by mutual funds and by making these funds available to investors that do not otherwise meet the sophistication criteria for investing in Canadian hedge funds. For more on the current regulatory environment in Canada, see our two-part series on “How U.S. Managers Can Raise Capital in Canada While Complying With Local Laws”: Part One (Apr. 27, 2017); and Part Two (May 4, 2017). For a discussion of the current regulatory environment in Canada, see “Fund Managers Looking to Canadian Market Must Be Aware of Nuances of Canada’s Regulatory Regime” (May 18, 2017).

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  • From Vol. 10 No.25 (Jun. 22, 2017)

    Anatomy of a Private Equity Fund Startup

    A recent Latham & Watkins program provided a soup-to-nuts overview of the steps to establish a private equity fund, covering the initial planning phase; development of fund infrastructure; and offering and closing process. The program featured David J. Greene and Amy R. Rigdon, partner and associate, respectively, at the firm. This article highlights the key points raised during the presentation, outlining the above three components of forming a private equity fund, along with issues and considerations that may arise during each phase of the process. For another look at the startup process, see “Establishing a Hedge Fund Manager in Seventeen Steps” (Aug. 27, 2015).

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  • From Vol. 10 No.21 (May 25, 2017)

    Beyond the Master-Feeder: Managing Liquidity Demands in More Flexible Fund Structures

    The private funds industry has been discussing the convergence of hedge and private equity funds for over a decade. The presence of “hybrid” fund vehicles, combining characteristics of both open- and closed-end funds, is nothing new. See “Institutional Investor Forum Focuses on Hedge Fund Manager Fiduciary Duty, SEC Subpoena Power, Hybrid Hedge Fund Structures, Managed Account Platforms, Codes of Ethics and More” (Feb. 4, 2010); and “Can a Capital on Call Funding Structure Fit the Hedge Fund Business Model?” (Nov. 5, 2009). Creatively structured investment vehicles that address relevant investment objectives, or regulatory, tax or similar issues, are becoming increasingly common. As private fund managers struggle to outperform the market and meet investor demands for bespoke fee, liquidity and special terms, those managers will often need to look beyond the master-feeder structure that has served them well for quite some time. For example, hedge funds with historically liquid portfolios are increasingly pursuing assets with longer investment horizons that, in the past, might have been housed in private equity-style products. In a guest article, Akin Gump partner Ira P. Kustin explores a number of tools that managers can use to effectively manage assets with different liquidity characteristics, while also addressing investor liquidity expectations. For additional insight from Kustin, see “Stars in Transition: A New Generation of Private Fund Managers” (Dec. 10, 2009); and “Addressing (and Resisting) Demands for Changes in Hedge Fund Manager Compensation” (Apr. 23, 2009).

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  • From Vol. 10 No.21 (May 25, 2017)

    How Managers Can Structure Direct Lending Funds to Minimize U.S. Tax Consequences to Non-U.S. and Tax-Exempt Investors: Treaty-Based and Registered Fund Structures (Part Two of Two)

    As investors continue to clamor for direct lending strategies by private fund managers, legal advisers have kept pace by developing sophisticated fund structures to help manage the tax issues prompted by loan origination. For additional considerations when structuring direct lending funds, see part two of our three-part series on hedge funds as direct lenders: “Structures to Manage the U.S. Trade or Business Risk to Foreign Investors” (Sep. 29, 2016). In a recent program, Kramer Levin Naftalis & Frankel partners Barry Herzog, Kevin P. Scanlan and George M. Silfen discussed four structuring options available to managers seeking to launch a fund that will engage in loan origination. This second article in our two-part series examines treaty-based fund structures and privately offered closed-end direct lending funds. The first article discussed common investment terms for direct lending funds; provided an overview of the tax implications of loan origination activity to foreign and U.S. tax-exempt investors; and discussed how the “season and sell” and blocker structures can minimize the potential tax consequences of loan origination. For more on direct lending, see “The Current State of Direct Lending by Hedge Funds: Fund Structures, Tax and Financing Options” (Oct. 27, 2016).

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  • From Vol. 10 No.20 (May 18, 2017)

    How Managers Can Structure Direct Lending Funds to Minimize U.S. Tax Consequences to Foreign and U.S. Tax-Exempt Investors: “Season and Sell” and Blocker Structures (Part One of Two)

    As banks focus on making large loans to corporations, some fund managers are stepping into the void and offering loans to small- and mid-sized businesses. Unlike investments in traded securities, loan origination in the U.S. raises tax issues for certain U.S. tax-exempt and foreign investors. See parts one and three of our series on hedge funds as direct lenders: “Tax Considerations for Hedge Funds Pursuing Direct Lending Strategies” (Sep. 22, 2016); and “Regulatory Considerations of Direct Lending and a Review of Fund Investment Terms” (Oct. 6, 2016). A recent seminar featuring Kramer Levin partners Barry Herzog, Kevin P. Scanlan and George M. Silfen provided a roadmap for managers seeking to form direct lending funds that minimize the adverse tax consequences to investors not otherwise subject to U.S. tax. This first article in our two-part series discusses common investment terms for direct lending funds; provides an overview of the tax implications from loan origination activity to foreign and U.S. tax-exempt investors; and discusses the tax mitigation benefits of “season and sell” and blocker structures. The second article will delve into treaty-based fund structures and privately offered closed-end direct lending funds as additional potential solutions to these direct lending tax concerns. For additional insights from Scanlan, see our three-part series on “Closing a Hedge Fund to Outside Investors”: Factors to Consider (Jan. 21, 2016); Operational Considerations (Jan. 28, 2016); and Mechanical Considerations (Feb. 4, 2016).

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  • From Vol. 10 No.19 (May 11, 2017)

    How Emerging Manager CTAs May Deploy UCITS and ETF Fund Structures to Access Foreign Capital

    Commodity trading advisors (CTAs) reeling from heavy outflows in 2016 may be looking for ways to begin making inroads into foreign markets in 2017. A wide array of options for doing so are available to CTAs, particularly via Undertakings for Collective Investments in Transferable Securities (UCITS) structures and exchange-traded funds (ETFs). For all their advantages, however, these vehicles’ complexity and cost may render them infeasible for a given CTA. Moreover, it is a mistake to assume that foreign jurisdictions share the pro-business stance of the new U.S. administration. Consequently, CTAs need to be exceedingly careful when choosing these vehicles, and an informed approach to these options can help CTAs flourish in foreign markets. All these points came across in a panel discussion during the recent CTAExpo/Emerging Manager Forum. Moderated by Stephen Klein, a portfolio manager at Abingdon Capital Management LLC, the panel featured Alex Lenhart, senior vice president of Singapore Exchange Ltd.; Bob Swarup, principal of Camdor Global Advisors Ltd.; Lynette Lim, co-chief executive officer of Phillip Capital Inc.; and Scott Brusso, senior director for foreign exchange and metals sales for Intercontinental Exchange, Inc. This article presents the key takeaways from the panel discussion. For more on the UCITS market and prospects for fund managers looking for opportunities abroad, see our two-part series, “Dechert Partners Outline Post-Brexit Cross-Border Marketing Options and the Viability of Domiciling Funds in Luxembourg” (Nov. 10, 2016); and “Dechert Partners Discuss Domiciling Funds in Germany or Ireland to Access the E.U. Post-Brexit, the Possible Introduction of PRIIPs and the Rising Prominence of UCITS Structures” (Nov. 17, 2016).

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  • From Vol. 10 No.17 (Apr. 27, 2017)

    Advantages and Drawbacks of Four Main Fund Structures for Offshore Launches in the BVI

    The British Virgin Islands (BVI) have become an increasingly attractive and competitive jurisdiction for launching, registering and operating investment funds over the last several decades. The BVI’s regulatory framework promotes flexibility, ease and speed of registration, along with offering various types of funds that managers can launch. Today, the BVI ranks as a leading offshore funds jurisdiction – second only to the Cayman Islands in popularity – in part due to the long-term benefits of the Mutual Funds Act of 1996, which helped pave the way for three general classes of BVI funds: private, professional and public. A fourth category of available BVI funds, known as “incubator” funds, is particularly attractive to emerging managers seeking to quickly launch a vehicle to begin establishing a track record. Fund managers contemplating the use of BVI vehicles must have a highly nuanced grasp of each structure's advantages and limitations. All these themes came across in a recent Hedge Fund Association (HFA) briefing featuring Alicia Green, marketing manager of BVI Finance, and Martin Litwak, founder of Litwak and Partners. This article summarizes the key takeaways from their discussion. For additional insight on how BVI law applies to private funds, see “What Does the Introduction of a Lighter Touch Fund Manager Regulatory Option in the British Virgin Islands Mean for Hedge Fund Managers?” (Feb. 14, 2013); and “Use by Private Fund Managers of the British Virgin Islands for Private Equity Fund Formation and Private Equity Investments” (Nov. 29, 2012). For coverage of another recent HFA event, see “Post-Brexit Environment Requires Fund Managers to Combine Granular Knowledge of Europe’s Varied Funds Markets With Appropriately Targeted Marketing Campaigns” (Mar. 2, 2017).

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  • From Vol. 10 No.16 (Apr. 20, 2017)

    Mourant Ozannes Partner Touts the Cayman Islands Hedge Fund Industry Amid Local and Foreign Developments

    As the arguable jurisdiction of choice for U.S. fund managers seeking to establish offshore funds, the Cayman Islands is frequently at the forefront of hedge fund industry innovations and developments. See “U.S., U.K. and Cayman Regulators Address Upcoming Areas of Focus, Passporting Concerns and Intra-Agency Collaboration” (Nov. 17, 2016). In terms of local developments, the Cayman Islands are fast approaching the first anniversary of the introduction of the limited liability company vehicle, as well as confronting dramatic changes to its fund governance practices. At the international level, the potential extension of the Alternative Investment Fund Managers Directive marketing passport to non-E.U. countries and the potential regulatory changes under the Trump administration each has a substantial bearing on the islands’ hedge fund industry. To help our readers better understand these developments and anticipate the future of the Cayman Islands’ hedge fund industry, The Hedge Fund Law Report recently interviewed Hayden Isbister, a partner at Mourant Ozannes and a panel moderator at the 2017 Cayman Alternative Investment Summit. For additional commentary from Isbister, see “Despite Fiduciary Duty Questions, Cayman LLCs Can Offer Savings and Other Advantages to Hedge Fund Managers” (Jul. 21, 2016). 

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  • From Vol. 10 No.16 (Apr. 20, 2017)

    Recent Tax Developments May Make U.K. Limited Companies More Favorable Than U.K. LLPs for U.S. Fund Managers

    U.S. fund managers that set up operations in the U.K. have historically tended to favor a U.K. limited liability partnership (LLP) as opposed to a U.K. limited company (LTD). In broad terms, the preference for using an LLP was due to the greater commercial and legal flexibility – and reduced U.K. tax burden – offered by the LLP structure. See “Potential Impact on U.S. Hedge Fund Managers of the Reform of the U.K. Tax Regime Relating to Partnerships and Limited Liability Partnerships” (Mar. 13, 2014). A number of recent U.K. developments, however, are likely to be material to any U.S. fund manager when deciding how to structure a new U.K. presence or when reconsidering any existing U.K. arrangements. In a guest article, Sidley Austin partner Will Smith examines the history of these structures, recent developments impacting their utility and considerations for managers converting from an LLP to an LTD. For additional insight from Smith, see our two-part series on the effect of recent U.K. legislation criminalizing the facilitation of tax evasion: “U.K. Proposes Legislation to Impose Criminal Liability on Companies and Partnerships Whose Employees and Other Agents Facilitate Tax Evasion” (Feb. 23, 2017); and “How U.S. Private Fund Managers May Avoid Running Afoul of Proposed U.K. Legislation Criminalizing the Facilitation of Tax Evasion” (Mar. 2, 2017); as well as our two-part series entitled “U.K. Disguised Fee Rules May Result in Increased U.K. Taxation of Investment Fees to Individuals Affiliated With Hedge Fund Managers”: Part One (Apr. 16, 2015); and Part Two (Apr. 23, 2015).

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  • From Vol. 10 No.15 (Apr. 13, 2017)

    New Rule Offers Managers a Way to Raise Capital in China

    Until recently, the only way for a U.S. fund manager to offer fund management services in China was through a non-controlling interest in a joint venture with a local manager. Earlier this year, the Asset Management Association of China issued a new rule permitting “wholly foreign-owned enterprises” (WFOEs) to offer private funds to qualified Chinese individual and institutional investors. For more on raising capital in China, see “How Private Fund Managers Can Access Investor Capital in Hong Kong and China: An Interview With Mayer Brown’s Robert Woll” (Feb. 23, 2017). In a recent program moderated by Sanjay Lamba, assistant general counsel of the Investment Adviser Association, K&L Gates partners Henry Wang and Joshua J. Yang offered a detailed roadmap to the formation and authorization of a private fund WFOE. This article summarizes the speakers’ insights. For a comprehensive look at opening a hedge fund management company in Hong Kong, see our four-part series “Primary Regulatory and Business Considerations When Opening a Hedge Fund Management Company Office in Asia”: Part One (Dec. 1, 2011); Part Two (Dec. 8, 2011); Part Three (Dec. 15, 2011); and Part Four (Jan. 19, 2012).

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  • From Vol. 10 No.14 (Apr. 6, 2017)

    Dechert Partners Discuss How Cross-Border European Fund Managers Can Prepare for Brexit’s Momentous Regulatory Effect 

    With the U.K.’s recent trigger of Article 50 setting in motion a two-year negotiation period for its departure from the E.U., private fund managers are left scrambling for solutions to replace the passporting rights upon which they currently rely to market their funds throughout the E.U. Fortunately, other European jurisdictions – such as Luxembourg, Germany and Ireland – have bolstered their infrastructures and processes to accommodate redomiciled funds and allow private fund managers to continue to access Europe. Each of these jurisdictions presents its own unique opportunities and challenges, however. These issues were analyzed in depth during the opening session of Dechert’s recent Global Alternative Funds Symposium. Moderated by Gus Black, a London-based partner of the firm, the panel featured Joseph Glatt, general counsel, secretary and vice president of Apollo Capital Management; and Dechert partners Patrick Goebel (Luxembourg), Jeff Mackey (Dublin) and Hans Stamm (Munich). This article presents the key takeaways from the panel discussion. For additional insights from Dechert attorneys, see our two-part series on navigating Europe post-Brexit: “Cross-Border Marketing Options and the Viability of Domiciling Funds in Luxembourg” (Nov. 10, 2016); and “Domiciling Funds in Germany or Ireland to Access the E.U. Post-Brexit, the Possible Introduction of PRIIPs and the Rising Prominence of UCITS Structures” (Nov. 17, 2016).

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  • From Vol. 10 No.14 (Apr. 6, 2017)

    FCA Report Explores the Impact of Platforms, Governing Bodies and Manager Compensation Structures on Fund Competition (Part One of Two)

    The U.K. Financial Conduct Authority (FCA) recently issued its Asset Management Market Study – Interim Report, MS15/2.2 (Report). The FCA surveyed a broad segment of investors, asset managers and other stakeholders to consider the impact on competition in the asset management industry of investor behavior, consultants, barriers to innovation, platforms, fund boards and cost controls. The Report is vital reading for investors that wish to discern fee considerations and risk-management concerns when performing due diligence on funds, as well as for fund managers that need to anticipate and adjust to potential FCA regulatory developments in these areas. This first article sets forth the Report’s findings concerning the impact of platforms, fund governance bodies and manager compensation on fund fees and competition. The second article will detail the Report’s analysis of the benefits of actively managed funds relative to their associated costs, as well as the role that cost controls have on competition. For additional coverage of recent FCA guidance, see “U.K. Investment Advisers Fail to Meet FCA Expectations on Best Execution and Dealing Commissions” (Mar. 23, 2017); “U.S. Managers Marketing to U.K. Investors Could Face Ballooning Reporting Burdens Under Proposed Rule” (Jul. 28, 2016); and “U.K. Financial Conduct Authority Issues Feedback Statement Supporting Proposed E.U. Limits on Soft Dollars” (Mar. 5, 2015).

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  • From Vol. 10 No.7 (Feb. 16, 2017)

    Malta’s New Notified AIF Vehicle Facilitates Quick Market Launches Without Requiring Regulatory Pre-Approval or Burdensome Ongoing Oversight

    In 2016, the Malta Financial Services Authority (MFSA) undertook a consolidation of its funds regime. This effort resulted in the addition of the notified alternative investment fund (Notified AIF) to Malta’s extensive range of fund structures. A Notified AIF is unique because it enables the timely launch of an alternative investment fund as long as it meets certain conditions to be “notified” to the MFSA by the AIF’s alternative investment fund manager. Under the Notified AIF framework, the MFSA focuses on regulating the product provider – in this case, the fund manager – rather than the fund product, which is what facilitates the launch of a Notified AIF without requiring pre-authorization by the MFSA. In a guest article, Dr. Yanika Fino, an associate at GANADO Advocates, describes the requirements for forming a Notified AIF, the types of funds that are eligible to use this vehicle and some of the pros and cons associated with pursuing this structure. For more on launching funds in Malta, see “What Malta Can Offer the Hedge Fund Industry: An Interview With the Chairman of FinanceMalta” (Jan. 26, 2017); and “European Alternative Funds: The Alternatives” (Jun. 24, 2009).

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  • From Vol. 10 No.4 (Jan. 26, 2017)

    What Malta Can Offer the Hedge Fund Industry: An Interview With the Chairman of FinanceMalta 

    Since entering the E.U. on May 1, 2004, Malta has dedicated significant resources to developing its financial services industry. As a member of the E.U., Malta offers investment managers a platform from which they can access the E.U. market – arguably in a more cost-effective manner than Luxembourg and Ireland. While European regulations grow exponentially, the Maltese government and the Malta Financial Services Authority have developed regimes to fit the various business models of investment managers. These range from lighter-regulated fund vehicles to Undertakings for Collective Investment in Transferable Securities structures, as well as the recent introduction of the Notified Alternative Investment Fund  a structure designed to be managed by alternative investment fund managers. To help our subscribers better understand the options Malta offers private investment funds and their investment managers, The Hedge Fund Law Report recently interviewed Kenneth Farrugia, Chairman of FinanceMalta, a public-private initiative that promotes Malta as an international financial center. Farrugia’s guidance is particularly relevant to managers exploring E.U. jurisdictions for future fund launches, as well as managers seeking a platform to distribute into the E.U. For additional insight on the benefits of establishing a fund in Malta, see “European Alternative Funds: The Alternatives” (Jun. 24, 2009). For more on offshore funds, see “Offshore Fund Vehicles: Do U.S. Investment Managers Need Them?” (Feb. 4, 2010).

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  • From Vol. 10 No.4 (Jan. 26, 2017)

    KKWC and EisnerAmper Panel Details Benefits, Tax Considerations, Common Structures and Terms of Seed Deals

    A recent panel hosted by EisnerAmper and Kleinberg, Kaplan, Wolff & Cohen discussed the current seeding landscape, focusing on common seed deal structures and terms, the availability of seed capital and common tax considerations in seed deals. For an overview of seeding and seed deal terms, see “Seward & Kissel Private Funds Forum Analyzes Trends in Hedge Fund Seeding Arrangements and Fee Structures (Part One of Two)” (Jul. 23, 2015). The program was moderated by Kleinberg Kaplan partner Eric S. Wagner, and featured his partners Philip S. Gross and Jason P. Grunfeld, as well as Frank L. Napolitani, director in the financial services group at EisnerAmper. This article highlights their insights. For more from Gross, see “Tax Court Decision Upholding ‘Investor Control’ Doctrine May Nullify Tax Benefits for Some Policyholders Investing in Hedge Funds Through Private Placement Life Insurance” (Jul. 23, 2015); and “The Impact of Revenue Ruling 2014-18 on Compensation of Hedge Fund Managers and Employees” (Jun. 19, 2014). 

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  • From Vol. 10 No.3 (Jan. 19, 2017)

    Ireland Further Opens the Door for Loan Origination in Europe by Relaxing Restrictions on Eligible Investments by Certain Irish Funds

    Ireland introduced a specific regulatory framework for loan originating investment funds in October 2014. In January 2017, the Central Bank of Ireland introduced flexibility to the permitted scope of activities of loan originating investment funds. Separately, the European Securities and Markets Authority has given its view on the necessary elements for a common European framework for loan origination by investment funds, and the European Commission has indicated that it intends to develop its thinking in this area as part of its ongoing work on building a capital markets union. See “E.U. Action Plan to Unify Capital Markets May Affect Hedge Fund Managers” (Oct. 8, 2015). In a guest article, partner Vincent Coyne of William Fry, along with associate David Naughton, outline the recent regulatory change in Ireland, analyze some of its practical implications, summarize the applicable regulatory framework and review how a manager may establish and obtain authorization for a loan originating investment fund in Ireland. For additional insight from Coyne, see “Trends in Irish Fund Launches and the Challenges – and Solutions – for Non-E.U. Fund Managers Using These Vehicles” (Oct. 6, 2016); and “New Irish Fund Structure Offers Re-Domiciliation Possibilities and Tax Advantages for Hedge Funds” (Mar. 12, 2015). For more on loan origination by private funds, see “The Current State of Direct Lending by Hedge Funds: Fund Structures, Tax and Financing Options” (Oct. 27, 2016); “Hedge Funds As Direct Lenders: Structures to Manage the U.S. Trade or Business Risk to Foreign Investors (Part Two of Three)” (Sep. 29, 2016); and “Hedge Funds As Shadow Banks: Tax Considerations for Hedge Funds Pursuing Direct Lending Strategies (Part One of Three)” (Sep. 22, 2016).

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  • From Vol. 9 No.48 (Dec. 8, 2016)

    How Fund Managers May Deploy the Cayman Islands LLC Structure

    Since the introduction of the Cayman Islands Limited Liability Companies Law on July 8, 2016, over 150 Cayman Islands limited liability companies (Cayman Islands LLCs or LLCs) have been registered. See “New Cayman Islands LLC Structure Offers Flexibility to Hedge Fund Managers” (Mar. 10, 2016). In a guest article, Walkers partners Tim Buckley and Melissa Lim, along with senior counsel Andrew Barker, review: (1) some of the key features of Cayman Islands LLCs, including how they differ from their Delaware counterparts and other Cayman Islands entities; (2) how LLCs are currently being used; and (3) possible future developments with respect to LLCs. For additional insight from Lim on the Cayman Islands LLC, see “Despite Fiduciary Duty Questions, Cayman LLCs Can Offer Savings and Other Advantages to Hedge Fund Managers” (Jul. 21, 2016). For further commentary from Buckley, see “Annual Walkers Fundamentals Seminar Discusses How Managers Attract Investors in a Challenging Market by Tailoring Fund Structures and Governance Policies” (Dec. 1, 2016); and “Speakers at Walkers Fundamentals Hedge Fund Seminar Discuss Recent Trends in Hedge Fund Terms, Corporate Governance, Side Letters, FATCA and Cayman Fund Regulation” (Dec. 20, 2012).

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  • From Vol. 9 No.47 (Dec. 1, 2016)

    Annual Walkers Fundamentals Seminar Discusses How Managers Attract Investors in a Challenging Market by Tailoring Fund Structures and Governance Policies 

    In a challenging funds market characterized by a high rate of redemptions and growing pressure on fees, fund managers are increasingly adopting strategies to curry favor with institutional investors. The popularity of these approaches is coupled with increased efforts by managers to monitor regulatory developments and ensure their compliance programs can withstand SEC scrutiny. See “How Hedge Fund Managers Can Accommodate Heightened Investor Demands for Bespoke Negative Consent, Liquidity, MFN and Other Provisions in Side Letters” (Oct. 13, 2016). These points came across in the annual Walkers Fundamentals Hedge Fund Seminar held in New York on November 1, 2016, which summarized the recent Walkers white paper that shared a title with the seminar. The speakers at the event included Walkers partners Tim Buckley, Ashley Gunning and Ingrid Pierce; Andrew Kandel, chief compliance officer, co-general counsel and senior managing director of Cerberus Capital Management; and Richard Swanson, managing director and general counsel of York Capital Management. This article highlights the key points presented during the seminar as well as Walkers’ insights contained in the white paper. For the HFLR’s coverage of the Walkers Fundamentals Hedge Fund Seminar from prior years, see: 2015 Seminar; 2014 Seminar; 2013 Seminar; 2012 Seminar; 2011 Seminar; and 2009 Seminar.

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  • From Vol. 9 No.45 (Nov. 17, 2016)

    Dechert Partners Discuss Domiciling Funds in Germany or Ireland to Access the E.U. Post-Brexit, the Possible Introduction of PRIIPs and the Rising Prominence of UCITS Structures (Part Two of Two)

    Brexit looms at a time ripe with new opportunities and challenges for managers seeking to market in the E.U. and around the world. On the one hand, managers must reconsider the types of vehicles and jurisdictions to use to preserve access to the E.U. markets. Additionally, new legislation – such as the impending Packaged Retail and Insurance-based Investment Products (PRIIPs) initiative – may present new barriers to managers marketing in Europe. On the other hand, however, global markets are opening up as certain vehicles, such as Undertakings for Collective Investment in Transferable Securities (UCITS), are increasingly welcomed by local regulators. These issues were discussed at a seminar entitled “Current and Future Developments: UCITS, AIFs, Brexit and Global Fund Distribution,” presented by Dechert’s financial services group on October 13, 2016. Moderated by Dechert partner Chris D. Christian, the seminar featured partners Richard L. Heffner, Karen L. Anderberg, Marc Seimetz, Mark Browne and Angelo Lercara. This article, the second in a two-part series, describes the increased usage of UCITS structures and the potential effect of impending PRIIPs legislation, as well as options for managers to domicile a fund in Germany or Ireland to market in the E.U. The first article in the series analyzed Brexit’s impact on structuring considerations, as well as the viability of domiciling funds in Luxembourg to access E.U. markets. For further commentary from Dechert attorneys, see “The Current State of Direct Lending by Hedge Funds: Fund Structures, Tax and Financing Options” (Oct. 27, 2016); and “What the Evolving European Marketing Environment Means for Hedge Fund GCs and CCOs” (Nov. 12, 2015).

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  • From Vol. 9 No.44 (Nov. 10, 2016)

    Dechert Partners Outline Post-Brexit Cross-Border Marketing Options and the Viability of Domiciling Funds in Luxembourg (Part One of Two)

    The likelihood of a “hard” Brexit poses many challenges for fund managers launching, marketing and distributing fund products in Europe. Nonetheless, funds have many options when it comes to cross-border transactions. Redomiciling a fund is far from the sole – or even the most obvious – choice. With a nuanced grasp of several structuring and regulatory options available in Europe, fund managers can make good use of opportunities available in Ireland, Luxembourg, Germany and other jurisdictions. For additional Brexit analysis, see our two-part series: “Effect of Hard vs. Soft Brexit on Hedge Fund Managers” (Jul. 7, 2016); and “Hedge Fund Marketing and Distribution Opportunities in a Post-Brexit World” (Jul. 14, 2016). These points were highlighted during a recent seminar presented by Dechert’s financial services group. Moderated by Dechert partner Chris D. Christian, the seminar featured partners Richard L. Heffner, Jr., Karen L. Anderberg, Marc Seimetz, Mark Browne and Angelo Lercara. This article, the first in a two-part series, presents the points raised during the seminar concerning structuring considerations in light of the impending Brexit, as well as the viability of Luxembourg as a domicile for managers to access E.U. markets. The second article will discuss the viability of domiciling a fund in Ireland or Germany to market in the E.U., as well as the rising prominence of Undertakings for Collective Investment in Transferable Securities structures. For additional commentary from Dechert attorneys, see “Recent Hedge Fund Fee and Liquidity Terms, the Growth of Direct Lending and Demands of Institutional Investors” (Jun. 14, 2016); “Dechert Global Alternative Funds Symposium Evaluates Liquid Alternative Funds and Fund Governance Trends” (Jun. 25, 2015); and “Key Deal Points and Tactics in Negotiations Between Hedge Fund Managers and Futures Commission Merchants Regarding Cleared Derivative Agreements” (Apr. 18, 2013).

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  • From Vol. 9 No.44 (Nov. 10, 2016)

    Mourant Ozannes Hires Corporate and Funds Attorney in Guernsey

    Frances Watson has joined the corporate and funds practices of Mourant Ozannes as a partner in Guernsey. She advises companies and funds on a range of transactions, including stock exchange listings, mergers and acquisitions, portfolio company transactions, competition law matters and restructurings. See “Hedge Fund Restructurings Becoming a Viable, and Variable, Alternative to Liquidation” (Feb. 12, 2009). For insight from Mourant Ozannes partners, see “Despite Fiduciary Duty Questions, Cayman LLCs Can Offer Savings and Other Advantages to Hedge Fund Managers” (Jul. 21, 2016); “Redeemed Investors Have Priority With Respect to Payment From Liquidating Cayman Islands Hedge Fund” (Sep. 10, 2015); and “The Cayman Islands Weavering Decision One Year Later: Reflections by Weavering’s Counsel and One of the Joint Liquidators” (Sep. 20, 2012).  

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  • From Vol. 9 No.42 (Oct. 27, 2016)

    The Current State of Direct Lending by Hedge Funds: Fund Structures, Tax and Financing Options

    A decrease in bank lending to small- and middle-market companies has created opportunities for private fund managers that wish to engage in direct lending. A recent program presented by Dechert explored the current growth in direct lending, focusing on fund structures and strategies, tax implications and debt financing for direct lending funds. The program featured Dechert partners Matthew K. Kerfoot and Russel G. Perkins. This article summarizes the speakers’ key insights. See our three-part series on hedge fund direct lending: “Tax Considerations for Hedge Funds Pursuing Direct Lending Strategies” (Sep. 22, 2016); “Structures to Manage the U.S. Trade or Business Risk to Foreign Investors” (Sep. 29, 2016); and “Regulatory Considerations of Direct Lending and a Review of Fund Investment Terms” (Oct. 6, 2016). For additional insight from Kerfoot, see “Dechert Panel Discusses Recent Hedge Fund Fee and Liquidity Terms, the Growth of Direct Lending and Demands of Institutional Investors” (Jun. 14, 2016); and “Dechert Webinar Highlights Key Deal Points and Tactics in Negotiations Between Hedge Fund Managers and Futures Commission Merchants Regarding Cleared Derivative Agreements” (Apr. 18, 2013). 

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  • From Vol. 9 No.40 (Oct. 13, 2016)

    Luxembourg Fund Structures Evolve to Meet the Needs of the Private Fund Industry

    On October 5, 2016, a seminar organized by the Association of the Luxembourg Fund Industry (ALFI), Luxembourg for Finance and the Luxembourg Private Equity & Venture Capital Association explored Luxembourg’s evolving role in financial markets and the private fund space. H.E. Pierre Gramegna, Luxembourg’s Minister of Finance, provided opening remarks, and a panel of experts from Luxembourg law firms, asset managers, banks, consultants and other firms contributed insights on a variety of issues, including Brexit, the new Reserved Alternative Investment Fund structure, private credit, Luxembourg limited partnerships, tax reforms and management companies. PwC partner Steven Libby moderated the discussion. This article highlights the principal points raised during the program. For coverage of a prior ALFI event, see “NICSA/ALFI Program Considers Impact of AIFMD on U.S. Fund Managers” (Sep. 25, 2014).

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  • From Vol. 9 No.39 (Oct. 6, 2016)

    Trends in Irish Fund Launches and the Challenges – and Solutions – for Non-E.U. Fund Managers Using These Vehicles

    Fund managers outside the E.U. are increasingly looking to Ireland’s thriving funds market as a way to access potential E.U. investors. Regulatory changes have allowed fund managers to take advantage of innovative approaches and strategies, resulting in record numbers of cross-border fund launches in the jurisdiction. A recent report published by Maples and Calder found, among other things, that there has been a sizable increase in Irish fund launches recently, along with a trend toward the use of tax transparent vehicles. This article analyzes the report, together with insight from partners at law firms at the forefront of fund interactions with Irish and E.U. regulators concerning how non-E.U. fund managers can circumvent obstacles – such as marketing, regulatory and remuneration issues – in order to take advantage of these vehicles. For more on issues pertinent to Irish fund vehicles, see “Walkers Fundamentals Hedge Fund Seminar Addresses Fund Structuring Trends, Governance Best Practices, Fee and Liquidity Terms, Irish Vehicles, Marketing in Asia and FATCA” (Feb. 12, 2015); and “Irish Central Bank Issues Proposed Rules to Enable Private Funds to Originate Loans” (Sep. 11, 2014). For additional insight from Maples and Calder, see “Tax, Legal and Operational Advantages of the Irish Collective Asset-Management Vehicle Structure for Hedge Funds” (Aug. 13, 2015); “Considerations for Hedge Fund Managers Evaluating Forming Reinsurance Vehicles in the Cayman Islands” (Sep. 4, 2014); and “Use by Private Fund Managers of the British Virgin Islands for Private Equity Fund Formation and Private Equity Investments” (Nov. 29, 2012).

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  • From Vol. 9 No.38 (Sep. 29, 2016)

    Hedge Funds As Direct Lenders: Structures to Manage the U.S. Trade or Business Risk to Foreign Investors (Part Two of Three)

    Investor demand for exposure to lending strategies continues unabated, as allocators seek investment strategies with attractive yields and lower correlation to the broader markets. Much of the demand comes from pension plans and foreign institutions, which often seek to invest through offshore funds. However, an offshore fund originating loans to U.S. companies runs the risk of being deemed to be engaged in a trade or business in the U.S., thus potentially subjecting its investors to an effective tax rate of more than 50 percent. See “IRS Memo Analyzes Whether Offshore Fund That Engaged in Underwriting and Lending Activities in the U.S. Through an Investment Manager Was Engaged in a ‘Trade or Business’ in the U.S. and Subject to U.S. Income Tax” (Jan. 29, 2015). To mitigate this risk, hedge fund managers have taken advantage of various strategies and structures. This article, the second in a three-part series, examines how direct lending can constitute engaging in a “U.S. trade or business” and explores options available to minimize this risk to investors in an offshore fund. The first article discussed the prevalence of hedge fund lending to U.S. companies and the primary tax considerations for hedge fund investors associated with direct lending. The third article will provide an overview of the regulatory environment surrounding direct lending and a discussion of the common terms applicable to direct lending funds. See also “Key Tax Issues Facing Offshore Hedge Funds: FDAPI, ECI, FIRPTA, the Portfolio Interest Exemption and ‘Season and Sell’ Techniques” (Jan. 22, 2015).

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  • From Vol. 9 No.29 (Jul. 21, 2016)

    Despite Fiduciary Duty Questions, Cayman LLCs Can Offer Savings and Other Advantages to Hedge Fund Managers

    On July 13, 2016, the highly anticipated Cayman Islands Limited Liability Companies Law, 2016, came into effect, making the limited liability company (LLC) fully available in that jurisdiction. Widely attributed to the demands of U.S. investors seeking an offshore equivalent to the Delaware LLC, the Cayman LLC has been met with positive reactions from onshore and offshore lawyers, though some have raised concerns about the vehicle’s governance. See “New Cayman Islands LLC Structure Offers Flexibility to Hedge Fund Managers” (Mar. 10, 2016). In an effort to help our readers understand structural, regulatory and registration issues of the Cayman LLC, The Hedge Fund Law Report has interviewed partners of law firms at the forefront of interactions with both the onshore financial sector and the Cayman Islands authorities regarding the law’s development. We present our findings in this article. For analysis of other recent developments in Cayman law, see “Cayman Islands Decision Highlights Three Questions That May Affect the Enforceability of Fund Side Letters” (May 28, 2015); and “Cayman Islands Monetary Authority Introduces Proposals to Apply Revised Governance Standards to CIMA-Regulated Hedge Funds and Require Registration and Licensing of Fund Directors” (Jan. 24, 2013).

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  • From Vol. 9 No.23 (Jun. 9, 2016)

    With Brexit Looming and New Fund Structures Available, U.S. Hedge Fund Managers Face Risks and Opportunities for Marketing in Europe

    The possibility of Britain’s electorate voting in a widely heralded June 23 referendum to leave the European Union – an eventuality popularly known as the “Brexit” – and the creation of the Luxembourg Reserved Alternative Investment Fund pose special challenges and opportunities for U.S. hedge fund managers marketing their products in the U.K. and Europe. One session of the Dechert Global Alternative Funds Symposium, held in New York on April 6, provided practical insight to help hedge fund managers understand, adapt to and take advantage of these changes and opportunities, including with respect to the marketing passport under the Alternative Investment Fund Managers Directive and the growing popularity of loan origination funds in Europe. Moderated by Boston-based Dechert partner Adrienne Baker, the panel featured London-based partners Richard Heffner and Stuart Martin; Luxembourg-based partner Antonios Nezeritis; and Munich-based partner Hans Stamm. For coverage of last year’s Symposium, see “Trends in Hedge Fund Expense Allocations, Fees, Redemptions and Gates” (May 21, 2015); and “Liquid Alternative Funds and Fund Governance Trends” (Jun. 25, 2015).

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  • From Vol. 9 No.17 (Apr. 28, 2016)

    New Luxembourg RAIF Structure Offers Marketing Options and Tax Benefits for Non-E.U. Hedge Fund Managers (Part Two of Two)

    The new Reserved Alternative Investment Fund (RAIF) structure unveiled by Luxembourg offers U.S. managers a flexible new option for marketing in the E.U. In addition, the structure allows U.S. managers to take advantage of certain tax benefits. Thus, the RAIF is a game changer for hedge fund managers and can also be a useful vehicle for real estate and private equity funds. At a recent presentation, the Association of the Luxembourg Fund Industry (ALFI) provided a comprehensive overview of the business, tax and regulatory ramifications of the RAIF. This second article in our two-part series explores opportunities presented by RAIFs for U.S. managers – including hedge fund, real estate and private equity managers – as well as tax considerations of the new fund structure. The first article summarized the panel’s discussion of the Luxembourg funds landscape and the key features of RAIFs. For more on the marketing options presented by Luxembourg fund structures, see “Luxembourg Financial Regulator Issues Guidance on AIFMD Marketing and Reverse Solicitation” (Sep. 3, 2015); and “How Can Hedge Fund Managers Use Luxembourg Funds to Access Investors and Investments in Europe, Asia and Latin America?” (Jul. 12, 2012).

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  • From Vol. 9 No.16 (Apr. 21, 2016)

    U.K. Treasury to Amend Private Fund Limited Partnership Structure to Address Consultation Responses

    In July 2015, the U.K. Treasury issued a consultation paper seeking comment on proposed revisions to the U.K. Limited Partnerships Act 1907 that would create a new type of entity known as a Private Fund Limited Partnership (PFLP). The new PFLP structure would ease certain administrative requirements applicable to limited partnerships and would provide a “white list” of permissible limited partner activities. The Treasury recently issued a summary of consultation responses revealing broad support for the proposals. This article examines the Treasury’s planned changes in response to those comments. For a discussion of the proposals, see “U.K. Treasury Proposes Limited Partnership Reforms to Boost Competitiveness of Private Fund Structures” (Aug. 27, 2015).

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  • From Vol. 9 No.14 (Apr. 7, 2016)

    Credit Suisse Survey Reveals Growing Demand by Hedge Fund Investors for Managed Accounts, Long-Only Funds and Alternative Mutual Funds

    Credit Suisse Capital Services (CS) recently released the results of its 2016 hedge fund investor survey. CS asked hedge fund investors about industry risks, trends and the drivers of investments and redemptions; appetite for non-traditional hedge fund investment vehicles; anticipated allocations; and performance expectations. Among the survey findings, CS found growing demand for alternatives to direct hedge fund investments, such as managed accounts, long-only funds and alternative mutual funds offered by hedge fund managers. This article examines key takeaways from the survey. For more on alternative mutual funds, see our three-part series on conflicts arising out of simultaneous management of hedge funds and alternative mutual funds: “Investment Allocation Conflicts” (Apr. 2, 2015); “Operational Conflicts” (Apr. 9, 2015); and “How to Mitigate Conflicts” (Apr. 16, 2015). For coverage of past CS investor surveys, see “Investor Appetite for Alternative Investment Vehicles and Strategy Preferences” (Aug. 27, 2015); “Factors in Institutional Investors’ Investment and Redemption Decisions, Appetite for Alternative UCITS and Anticipated 2015 Hedge Fund Investments by Strategy and Region” (Mar. 27, 2015); and “Allocation Preferences of Hedge Fund Investors, With Particular Attention on Preferences of Pension Funds and Insurance Companies” (Mar. 14, 2013).

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  • From Vol. 9 No.13 (Mar. 31, 2016)

    Reduced Management Fees and Narrower Liquidity Among Trends in New Hedge Funds

    A recent study conducted by Seward & Kissel reveals that newly launched hedge funds are offering lower average management fees than previously recorded, while simultaneously offering more restrictive redemption terms. In its annual hedge fund study, Seward & Kissel analyzed several key findings relating to funds launched in 2015 by new U.S.-based manager clients. This article summarizes key takeaways from the study, including investment strategy trends; incentive allocations and management fees; liquidity terms; fund structures; and founder or seed capital. For HFLR coverage of previous editions of Seward & Kissel’s annual study, see: 2014 Study (Mar. 5, 2015); 2012 Study (Apr. 11, 2013); and 2011 Study (Feb. 23, 2012).

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  • From Vol. 9 No.10 (Mar. 10, 2016)

    New Cayman Islands LLC Structure Offers Flexibility to Hedge Fund Managers

    On December 18, 2015, Cayman Islands authorities published a bill for a new law that allows for the formation of Cayman Islands limited liability companies (Cayman LLCs). Similar to a Delaware limited liability company, the Cayman LLC provides managers with additional flexibility and options for forming hedge funds in the Cayman Islands. In a recent interview with The Hedge Fund Law Report, Jude Scott, the Chief Executive Officer of Cayman Finance; Henry Smith, a partner at Maples and Calder and Chair of the International Relations Committee of Cayman Finance; and Hon. Wayne Panton, Minister of Financial Services, Commerce and Environment for the Cayman Islands Government, discussed the Cayman LLC, detailing the new vehicle’s requirements, potential uses and implications for hedge fund managers. In addition, Scott, Smith and Minister Panton discussed the possibility of the AIFMD marketing passport being extended to the Cayman Islands. For other issues relating to structuring Cayman Islands hedge funds, see “Cayman Islands Government Introduces Bill That Would Require Registration and Licensing of Certain Hedge Fund Directors” (Mar. 28, 2014); and “Cayman Islands Segregated Portfolio Companies: New Case Law Highlights Attractions for Promoters and Hedge Fund Managers” (Jul. 26, 2012).

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  • From Vol. 9 No.3 (Jan. 21, 2016)

    Going Private: Factors to Consider When Closing a Hedge Fund to Outside Investors (Part One of Three)

    In late 2015, BlueCrest Capital Management announced that it would be returning outside capital and transitioning to a private investment partnership, managing only assets of its partners and employees. In doing so, BlueCrest has joined the growing ranks of hedge fund managers who, for a number of reasons, have decided to close their funds to outside investment and convert into a private structure. Historically, hedge fund managers weary of investor demands; increased regulatory and compliance requirements; and potential publicity issues have typically converted to family office structures. See “Legal Mechanics of Converting a Hedge Fund Manager to a Family Office” (Dec. 1, 2011). However, there are options beyond a family office for taking a hedge fund private. This article, the first in a 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 will examine the operational considerations a hedge fund manager faces when converting its hedge fund, including ongoing regulatory obligations and staffing concerns. The third article will detail the mechanics for taking a hedge fund private, including redemption of outside investors and costs of conversion.

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  • From Vol. 8 No.33 (Aug. 27, 2015)

    U.K. Treasury Proposes Limited Partnership Reforms to Boost Competitiveness of Private Fund Structures

    HM Treasury recently published proposals to reform partnership legislation to ensure that the U.K. limited partnership structure remains the vehicle of choice for European private equity, venture capital and other types of U.K.-domiciled private funds.  Technical changes to the partnership legislation applicable to private funds are proposed to be made by means of a legislative reform order, intended to remove unnecessary legal complexity and administrative burdens for both limited partnership managers and investors.  The reforms broadly address registration; ongoing notification requirements; capital contributions; limited partners’ rights and actions; wind-downs; and striking-off in relation to private fund limited partnerships.  This article reviews the reasons for the proposed reforms and sets out the specific amendments encapsulated in the draft order and accompanying consultation paper.  For more on private equity, see “Dechert Global Alternative Funds Symposium Highlights Portfolio Management and Global Trends for Private Equity and Real Estate Funds,” The Hedge Fund Law Report, Vol. 8, No. 26 (Jul. 2, 2015); and “How to Mitigate Conflicts Arising Out of Simultaneous Management of Hedge Funds and Private Equity Funds (Part Three of Three),” The Hedge Fund Law Report, Vol. 8, No. 20 (May 21, 2015).  For discussions regarding other European fund structures, see “Tax, Legal and Operational Advantages of the Irish Collective Asset-Management Vehicle Structure for Hedge Funds,” The Hedge Fund Law Report, Vol. 8, No. 32 (Aug. 13, 2015); and “How Can Hedge Fund Managers Use Luxembourg Funds to Access Investors and Investments in Europe, Asia and Latin America?,” The Hedge Fund Law Report, Vol. 5, No. 27 (Jul. 12, 2012). 

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  • From Vol. 8 No.32 (Aug. 13, 2015)

    Tax, Legal and Operational Advantages of the Irish Collective Asset-Management Vehicle Structure for Hedge Funds

    The Irish Collective Asset-management Vehicles Act came into operation in March 2015 and allows for the creation of an innovative, tax-efficient corporate structure for Irish investment funds which sits alongside existing Irish fund structures.  See “New Irish Fund Structure Offers Re-Domiciliation Possibilities and Tax Advantages for Hedge Funds,” The Hedge Fund Law Report, Vol. 8, No. 10 (Mar. 12, 2015).  There has been widespread industry interest in the Irish collective asset-management vehicle (ICAV), with a number of leading asset managers such as Permal, Deutsche Bank and Legg Mason already having established ICAVs and a host of other asset managers in the process of either converting to or establishing new ICAVs.  Since the Central Bank of Ireland opened the ICAV register on March 16, 2015, there have been over 30 ICAVs authorized, representing in excess of $30 billion of inflows into Irish funds.  In a guest article, Ian Conlon of Maples and Calder explains the key features and advantages of the new ICAV structure and discusses how hedge fund managers can establish ICAVs, redomicile funds to Ireland and convert existing Irish fund vehicles so they can take advantage of the newly available structure.  For additional insight from Maples and Calder, see “Considerations for Hedge Fund Managers Evaluating Forming Reinsurance Vehicles in the Cayman Islands,” The Hedge Fund Law Report, Vol. 7, No. 33 (Sep. 4, 2014); and “Use by Private Fund Managers of the British Virgin Islands for Private Equity Fund Formation and Private Equity Investments,” The Hedge Fund Law Report, Vol. 5, No. 45 (Nov. 29, 2012).

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  • From Vol. 8 No.28 (Jul. 16, 2015)

    “Interval Alts” Combine Benefits of Alternative Mutual Funds and Traditional Hedge Funds

    Following a flurry of interest in “liquid alt” funds (also known as alternative mutual funds), Interval Alts are becoming increasingly popular.  In 2015 alone, there have been ten filings for new Interval Alts.  Interval Alts are non-traded closed-end funds registered under the Investment Company Act of 1940, but they function very much like traditional hedge funds.  In addition to employing alternative strategies, they have terms similar to those of hedge funds, such as monthly subscriptions and quarterly or semi-annual liquidity.  Because of the commonality in offering terms, many Interval Alts also charge fees similar to their sister hedge funds managed by the same manager (e.g., fees of 2 and 20, or some variation thereof).  Unlike hedge funds, however, they may be publicly offered and therefore may be offered in a variety of distribution channels.  In a guest article, George M. Silfen and Ronald M. Feiman of Kramer Levin Naftalis & Frankel examine the regulatory basis for Interval Alts; explore the differences between such structures and liquid alternative funds; and address the marketing advantages of Interval Alts versus traditional hedge funds.  The authors also provide an extensive chart comparing Interval Alts to alternative mutual funds and traditional hedge funds.  For additional insight from Silfen, see “Kramer Levin Partner George Silfen Discusses Challenges Faced by Hedge Fund Managers in Operating and Distributing Alternative Mutual Funds,” The Hedge Fund Law Report, Vol. 6, No. 16 (Apr. 18, 2013); and “How to Mitigate Conflicts Arising Out of Simultaneous Management of Hedge Funds and Alternative Mutual Funds Following the Same Strategy (Part Three of Three),” The Hedge Fund Law Report, Vol. 8, No. 15 (Apr. 16, 2015).  For more from Kramer Levin partners, see “OTC Derivatives Clearing: How Does It Work and What Will Change?,” The Hedge Fund Law Report, Vol. 4, No. 24 (Jul. 14, 2011).

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  • From Vol. 8 No.20 (May 21, 2015)

    Deutsche Bank Alternative Investment Survey Reveals Investor Appetite for Hedge Funds and Other Alternative Investments and Strategies, and Criteria for Investing in Hedge Funds (Part One of Two)

    Deutsche Bank Global Prime Finance (DB) has released the results of its 13th annual Alternative Investment Survey.  This article, the first of two-part coverage, describes the survey methodology and demographics and summarizes the portions of the survey that deal with allocations to alternative investments in general, and to hedge funds in particular; allocation plans by strategy and region; and investor preferences regarding hedge fund track record, minimum size, and initial and target investment ticket sizes.  The second article in the series will discuss the portions of the survey that address fees and liquidity trends; trends among intermediaries; and early stage investing and seeding.  For coverage of DB’s November 2013 survey, see “Deutsche Bank Survey Describes the Contours of the Nontraditional Hedge Fund Product Market: Investor Appetite, Performance, Marketing, Fees and More,” The Hedge Fund Law Report, Vol. 7, No. 3 (Jan. 23, 2014).  For coverage of other recent surveys of investor preferences with regard to alternative investments, see “Credit Suisse Hedge Fund Survey Considers Factors in Institutional Investors’ Investment and Redemption Decisions, Appetite for Alternative UCITS and Anticipated 2015 Hedge Fund Investments by Strategy and Region,” The Hedge Fund Law Report, Vol. 8, No. 12 (Mar. 27, 2015); and “Ernst & Young’s 2014 Global Hedge Fund and Investor Survey Considers Growth Areas for Hedge Fund Managers, Related Costs and Challenges, Operating Expenses and Cybersecurity,” The Hedge Fund Law Report, Vol. 8, No. 2 (Jan. 15, 2015).

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  • From Vol. 8 No.18 (May 7, 2015)

    Investment Conflicts Arising Out of Simultaneous Management of Hedge Funds and Private Equity Funds (Part One of Three)

    As private fund managers seek to diversify their product offerings and lines of business, management companies are increasingly operating hedge funds and private equity funds simultaneously.  However, such simultaneous management gives rise to potential conflicts of interest, including issues relating to allocation of investment opportunities between the funds, possession of material nonpublic information, valuation and allocation of expenses.  The SEC has identified conflicts of interest as one of the top enforcement priorities for 2015, and the SEC’s Asset Management Unit is expected to continue examining advisers to determine whether they have appropriately discharged their fiduciary obligations to identify conflicts of interest and eliminate them or mitigate and disclose them.  See “ACA Compliance Professionals and SEC Veteran John H. Walsh Share Insights on SEC Priorities for 2015,” The Hedge Fund Law Report, Vol. 8, No 16 (Apr. 23, 2015); and “Conflicts Remain an Overarching Concern for the SEC’s Asset Management Unit,” The Hedge Fund Law Report, Vol. 8, No. 10 (Mar. 12, 2015).  Accordingly, especially in today’s regulatory environment, managers must be aware of and mitigate such conflicts of interest.  This article, the first in a three-part series, explores the structural considerations that give rise to potential conflicts and examines the potential conflicts involving the investments held by each fund, as well as conflicts with the allocation of investment and disposition opportunities between affiliated hedge funds and private equity funds.  The second article will discuss operational conflicts arising out of simultaneous management of hedge funds and private equity funds, including conflicts involving the possession of material nonpublic information, valuation, allocation of expenses, personal trading and investors.  The third article will address offshore concerns and ways to mitigate conflicts of interest.  See also “Investment Allocation Conflicts Arising Out of Simultaneous Management of Hedge Funds and Alternative Mutual Funds Following the Same Strategy (Part One of Three),” The Hedge Fund Law Report, Vol. 8, No. 13 (Apr. 2, 2015).

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  • From Vol. 8 No.11 (Mar. 19, 2015)

    Structuring Private Funds to Profit from the Oil Price Decline: Due Diligence, Liquidity Management and Investment Options

    Energy companies directly or indirectly reliant on reserve based lending and public equity markets are feeling pressure as markets have tightened, as evidenced by recent significant stock declines, IPO delays, dividend and distribution cuts and missed interest payments leading to bankruptcy filings.  If lower prices are sustained, this financial pressure will continue over time as reserves are increasingly valued at lower prices, interest rates move upward and poorly hedged exploration and production companies and counterparties face unfavorable positions.  In such a market, leveraged and shale focused high-yield exploration and production companies, shale-reliant and undiversified oil field services companies and small- to medium-sized financial institutions with significant exposure to such companies and the boom oil patch areas generally will present distressed investors with plenty of opportunities to extract value from current market conditions.  Along with the financial considerations, investment funds looking to take advantage of distressed energy opportunities will have to consider various legal matters including structuring the investments, due diligence and dealing with potentially illiquid positions.  This guest article describes the market context, focusing on opportunities for hedge funds and other players arising out of the oil price plunge; the palette of investment options available to managers looking to invest in or around oil price movements; the balance between speed and comprehensiveness in due diligence; and tax, liquidity and other fund structuring considerations.  The authors of this article are James Deeken and Shubi Arora, both partners at Akin Gump Strauss Hauer & Feld; Jhett Nelson, counsel at Akin; and Stephen Harrington, an Akin associate.

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  • From Vol. 8 No.10 (Mar. 12, 2015)

    New Irish Fund Structure Offers Re-Domiciliation Possibilities and Tax Advantages for Hedge Funds

    The Irish Parliament recently passed legislation to provide for a structure specifically tailored to meet the needs of the global funds industry.  The legislation creates a new form of corporate vehicle for funds, known as the Irish Collective Asset-Management Vehicle (ICAV).  In addition to minimizing the administrative complexity and cost of establishing and maintaining a collective investment scheme in Ireland, the ICAV will be an “eligible entity” for U.S. tax purposes, allowing it to “check the box.”  It is anticipated that the ICAV will make it increasingly attractive for fund promoters to establish new corporate funds in Ireland or, allied with the user-friendly Irish re-domiciliation mechanism, to re-domicile offshore funds to Ireland.  See “Redomiciling Offshore Investment Funds to Ireland, the European Gateway,” The Hedge Fund Law Report, Vol. 4, No. 8 (Mar. 4, 2011).  The Central Bank of Ireland has recently confirmed that it stands ready and able to accept applications for ICAV structures within two weeks of the legislation being enacted.  In a guest article, Vincent Coyne, a Senior Associate in William Fry’s Asset Management and Investment Funds Department, first focuses on key tax considerations of the ICAV and the opportunities this creates for re-domiciling to Ireland, then examines the practical legal benefits of the new regime.

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  • From Vol. 8 No.9 (Mar. 5, 2015)

    Seward & Kissel New Hedge Fund Study Identifies Trends in Investment Strategies, Fees, Liquidity Terms, Fund Structures and Strategic Capital Arrangements

    Despite a persistently challenging capital raising environment, 2014 saw the launch of initial hedge funds by a number of new hedge fund managers, an increasing number of which offer tiered management fees or founders share classes.  See “How Can Hedge Fund Managers Use Founder Share Classes to Raise and Retain Capital?,” The Hedge Fund Law Report, Vol. 5, No. 28 (Jul. 19, 2012).  Seward & Kissel LLP recently published its annual study analyzing several key findings relating to newly formed funds launched in 2014 by its U.S.-based manager clients.  This article summarizes important takeaways from the study, including trends with respect to investment strategies, fees, liquidity terms, fund structures and strategic capital arrangements.  For the HFLR’s coverage of previous editions of Seward’s annual study, see “Seward & Kissel Study of New Hedge Fund Launches Identifies Trends in Preferred Investment Strategies, Fees, Liquidity Terms, Fund Structures and Strategic Capital Arrangements,” The Hedge Fund Law Report, Vol. 6, No. 15 (Apr. 11, 2013); and “Seward & Kissel Study Highlights Trends in Hedge Fund Investment Strategies, Fee and Liquidity Terms, Fund Structures and Strategic Capital for New Managers,” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).

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  • From Vol. 8 No.6 (Feb. 12, 2015)

    Walkers Fundamentals Hedge Fund Seminar Addresses Fund Structuring Trends, Governance Best Practices, Fee and Liquidity Terms, Irish Vehicles, Marketing in Asia and FATCA

    Walkers Global recently held its Fundamentals Hedge Fund Seminar in New York City, where experts addressed a range of pressing issues in the industry, including recent developments in fund structuring and common Cayman fund terms; updates on fund governance regulations introduced by the Cayman Islands Monetary Authority and trends in hedge fund governance; implications of the Foreign Account Tax Compliance Act for hedge fund managers; and global hedge fund investment and regulatory trends, particularly in Asia and Ireland.  This article summarizes the key points discussed at the conference on each of the foregoing topics.  For the HFLR’s coverage of Walkers Fundamentals Hedge Fund Seminars from prior years, see: 2013 Seminar; 2012 Seminar; 2011 Seminar; and 2009 Seminar.

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  • From Vol. 7 No.44 (Nov. 20, 2014)

    Eight Important Regulatory and Operational Differences Between Managing Hedge Funds and Alternative Mutual Funds

    Participants at a recent Financial Research Associates (FRA) event analyzed eight of the most important regulatory and operational considerations in managing alternative mutual funds.  Participants also highlighted how each of those considerations applies differently to hedge funds and alternative mutual funds.  For example, both hedge funds and alternative mutual funds need to be concerned with leverage limitations.  However, the sources of such limitations, their impact on investment strategy, the operational infrastructure necessary to implement and monitor such limitations, relevant compliance issues and other dynamics are different for the different products.  While superficially similar – especially when following similar strategies – hedge and mutual funds are very different products from the perspectives of operations and regulatory compliance.  That was the core thesis of the FRA program; and this article conveys both the key points of difference and the business consequences of such product variation.  See also “The First Steps to Take When Joining the Rush to Offer Registered Liquid Alternative Funds,” The Hedge Fund Law Report, Vol. 7, No. 42 (Nov. 6, 2014); “How Can Hedge Fund Managers Organize and Operate Alternative Mutual Funds to Access Retail Capital? (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 6 (Feb. 7, 2013).

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  • From Vol. 7 No.41 (Oct. 30, 2014)

    Tax, Structuring, Compliance and Operating Challenges Raised by Hedge Funds Offered Exclusively to Insurance Companies

    Insurance dedicated funds (IDFs) are hedge funds offered exclusively to insurance companies and indirectly capitalized by the insurers’ life insurance or annuity policyholders.  For hedge fund managers, IDFs offer tax advantages, a niche marketing opportunity and a resilient investor base.  In connection with a Hedge Fund Association Symposium on the topic being held today in Fort Lauderdale, The Hedge Fund Law Report recently interviewed Greenberg Traurig shareholder Scott MacLeod on structuring, operational, tax, compliance, marketing and related considerations in connection with IDFs.  Specifically, MacLeod addressed salient tax considerations from the perspectives of investors, insurance companies and managers; hedge fund strategies that lend themselves to IDFs; relevant control and diversification requirements; redemption and liquidity issues; consequences of insurer insolvencies; material terms of governing documents; differences between IDFs and reinsurance vehicles launched by hedge fund managers; IDF platforms; private placement variable annuities; and compliance challenges specific to IDFs.  See also “Investments by Family Offices in Hedge Funds through Variable Insurance Policies: Tax-Advantaged Structures, Diversification and Investor Control Rules and Restructuring Strategies (Part One of Two),” The Hedge Fund Law Report, Vol. 4, No. 11 (Apr. 1, 2011).

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  • From Vol. 7 No.36 (Sep. 25, 2014)

    Sidley Partners Discuss Evolving Hedge Fund Fee Structures, Seed Deal Terms, Single Investor Hedge Funds, Risk Aggregators, Expense Allocations, Co-Investments and Fund Liquidity (Part One of Two)

    Sidley Austin recently hosted its annual private funds event in New York City.  This article is the first in a two-part series covering that event.  This article highlights the most useful points made during a discussion entitled “Hedge Fund Terms and Trends,” featuring Sidley partners Benson R. Cohen, Janelle Ibeling, William D. Kerr and Christopher P. Lokken.  The partners addressed registered funds; challenges presented by single investor or single relationship hedge funds; use of and resistance by managers to risk aggregators; seed deal terms and trends; structures for aligning fund liquidity with investment duration; expense allocations; developments in fund structuring; and the impact of the Volcker Rule on hedge fund investments by bank aggregator platforms.  The discussion also provided a uniquely candid and relevant discussion of evolving fee structures and models for hedge funds and other entities used to offer alternative investment strategies.  Sidley sees and structures hedge funds and related vehicles across a wide range of strategies, sizes and geographies.  Accordingly, insight from Sidley partners on fees is generally relevant to hedge fund managers launching new products or justifying or amending fee structures on existing products.  The Hedge Fund Law Report previously covered Sidley’s 2013 private funds conference in three parts.  See Part One, Part Two and Part Three.

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  • From Vol. 7 No.34 (Sep. 11, 2014)

    Irish Central Bank Issues Proposed Rules to Enable Private Funds to Originate Loans

    Hedge funds domiciled in Ireland are often organized as Qualifying Investor Alternative Investment Funds.  See “Considerations for Launching Qualified Investor Funds in Ireland: An Interview with Pat Lardner, Chief Executive of the Irish Funds Industry Association,” The Hedge Fund Law Report, Vol. 5, No. 31 (Aug. 9, 2012).  Such funds have been prohibited from originating loans.  The Central Bank of Ireland, which regulates such funds, recently proposed rules that would permit such funds to originate loans and has solicited stakeholder comments on those rules.  The so-called Loan Originating Qualifying Investor Alternative Investment Funds would be permitted to originate loans under certain stringent conditions, including that the fund be closed-ended and that lending be its sole business activity.  See also “Allen & Overy Report Suggests that Pressure from New Regulations on Bank Lending May Create Additional Opportunities for Hedge Funds and Other Non-Bank Sources of Capital,” The Hedge Fund Law Report, Vol. 5, No. 48 (Dec. 20, 2012).  This article provides a detailed discussion of the Central Bank’s proposed rules on lending by private funds, and includes context and market color from Andrew Bates, a partner in Dublin-based Dillon Eustace.

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  • From Vol. 7 No.22 (Jun. 6, 2014)

    Benefits and Burdens for Hedge Fund Managers in Establishing or Converting to a Family Office

    In this guest article, Pamela Snetro and Christopher Cavallaro, both financial advisers with Morgan Stanley Wealth Management, define a single family office and a multifamily office; identify potential benefits of a family office for hedge fund manager principals; list five potential concerns for hedge fund manager principals in establishing a family office; and highlight some of the reasons why hedge fund managers may consider converting to a family office format.  See “Legal Mechanics of Converting a Hedge Fund Manager to a Family Office,” The Hedge Fund Law Report, Vol. 4, No. 43 (Dec. 1, 2011).

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  • From Vol. 7 No.19 (May 16, 2014)

    Anatomy of a Publicly-Offered Private Equity Investment Vehicle

    Alternative investment consulting and advisory firm Altegris, in cooperation with private fund and asset manager Kohlberg Kravis Roberts & Co. L.P. (KKR), is planning to offer access to KKR funds to certain retail investors through a new closed-end investment company (Fund).  The Fund recently filed a Registration Statement under both the Securities Act of 1933 and the Investment Company Act of 1940.  Shares in the Fund will be offered only to accredited investors.  The Fund expects to invest most of its assets in funds sponsored by KKR or in co-investment opportunities with KKR.  See “Co-Investments in the Hedge Fund Context: Fiduciary Duty Concerns, Conflicts and Regulatory Risks (Part Three of Three),” The Hedge Fund Law Report, Vol. 7, No. 9 (Mar. 7, 2014).  This article details the mechanics of the offering.  See “Citi Prime Finance Report Describes the Competition among Traditional, Hedge and Private Equity Fund Managers for $1.3 Trillion in Liquid Alternative Assets (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 22 (May 30, 2013).

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  • From Vol. 7 No.17 (May 2, 2014)

    Multi-Manager Hedge Funds: Structuring, Fees, Manager Compensation, Marketing, Risk Management and Performance Measurement

    Hedge fund managers invest in securities.  Hedge fund of funds managers invest in people.  Somewhere in between are multi-manager hedge funds, in which a senior management team allocates capital to internal portfolio managers, monitors firm-wide risk and centralizes back-office functions.  Multi-manager funds are growing quickly, especially relative to conventionally run hedge fund groups.  The ten largest multi-manager funds had AUM of $100 billion as of mid-2013, reflecting net inflows of $15 billion since the beginning of 2009.  The ten largest conventionally run hedge funds had $140 billion in AUM as of mid-2013, reflecting net outflows of $28 billion since the beginning of 2009.  To give our subscribers greater insight into what multi-manager hedge funds are, how they are structured and how they operate, The Hedge Fund Law Report recently conducted an interview with Tomas Kmetko, a research consultant at Cambridge Associates.  Our interview covered, among other topics: the difference between multi-manager funds and funds of funds; legal entity and fee structuring; design of compensation mechanisms; risk management and mitigation in the multi-manager format; allocation of responsibility for legal, compliance, technology and similar functions; marketing of multi-manager funds; comparing performance of multi-manager funds with traditional hedge funds; and talent management considerations.

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  • From Vol. 7 No.14 (Apr. 11, 2014)

    Barclays Surveys Options for Hedge Fund Managers in Alternative Mutual Fund Space

    Barclays Bank PLC recently released a survey report describing the opportunities and risks faced by hedge fund managers that launch retail alternative funds.  This article provides a detailed summary of the survey.  For another look at the market for alternative mutual funds and other non-traditional products, see “Deutsche Bank Survey Describes the Contours of the Nontraditional Hedge Fund Product Market: Investor Appetite, Performance, Marketing, Fees and More,” The Hedge Fund Law Report, Vol. 7, No. 3 (Jan. 23, 2014).

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  • From Vol. 7 No.8 (Feb. 28, 2014)

    Co-Investments in the Hedge Fund Context: Structuring Considerations and Material Terms (Part Two of Three)

    Co-investments have been a regular feature of private equity investing for decades but historically have played a smaller role in the world of hedge funds.  However, as the range of strategies pursued by hedge funds increases – in particular, as more hedge fund assets are committed to activism, distressed and other illiquid strategies – co-investments are assuming a more prominent place in the hedge fund industry.  In an effort to help hedge fund managers assess the role of co-investments in their investment strategies and operating frameworks, The Hedge Fund Law Report is publishing a three-part series on the structure, terms and risks of hedge fund co-investments.  This article, the second in the series, describes the three general approaches to structuring co-investments; discusses the five factors that most directly affect management fee levels on co-investments; outlines the applicable incentive fee structures; details common liquidity or lockup arrangements; and highlights relevant fiduciary duty and insider trading considerations.  The first article in this series discussed five reasons why hedge fund managers offer co-investments; two reasons why investors may be interested in co-investments; the “market” for how co-investments are handled during the negotiation of initial fund investments; investment strategies that lend themselves to co-investments; and types of investors that are appropriate for co-investments.  See “Co-Investments Enable Hedge Fund Managers to Pursue Illiquid Opportunities While Avoiding Style Drift (Part One of Three),” The Hedge Fund Law Report, Vol. 7, No. 7 (Feb. 21, 2014).  The third article will discuss regulatory and other risks in connection with co-investments.

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  • From Vol. 7 No.8 (Feb. 28, 2014)

    Seward & Kissel Study of 2013 Hedge Fund Launches Identifies Trends in Fees, Liquidity, Lockups, Structuring and Seed Investing

    Seward & Kissel LLP recently published the 2013 edition of its annual study of new hedge fund launches.  The 2013 study covered hedge funds newly formed during 2013 by new U.S.-based managers that are Seward clients.  The study collected and presented data on trends in investment strategies, incentive fees, management fees, lockups, founder share classes, liquidity, structuring, minimum investments, general solicitation, and founder and seed capital.  This article highlights the main conclusions of the study.  The HFLR previously covered the 2012 and 2011 versions of Seward’s study.

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  • From Vol. 7 No.1 (Jan. 9, 2014)

    2013 Walkers Fundamentals Hedge Fund Seminar Highlights Trends in Cayman Fund Structures and Terms, Cayman and Irish Fund Governance Developments, Conflicts of Interest, Use of Advisory Boards and Fund Borrowing

    On November 5, 2013, international law firm Walkers Global held its annual Walkers Fundamentals Hedge Fund Seminar in New York City.  At the seminar, Walkers partners offered insights on trends in structures and terms for new funds organized in Cayman; developments in Cayman and Irish fund governance; regulatory focus on conflicts of interest; the use of advisory boards; and trends in fund borrowing.  This article summarizes key points raised during the seminar.  For the HFLR’s coverage of Walkers Fundamentals Hedge Fund Seminars from prior years, see: 2012 Seminar; 2011 Seminar; and 2009 Seminar.

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  • From Vol. 6 No.46 (Dec. 5, 2013)

    Annual Thompson Hine Hedge Fund Seminar Offers Insights on Organizing Alternative Mutual Funds, AIFMD, FATCA and the JOBS Act

    Thompson Hine LLP recently hosted its ninth annual hedge fund seminar, entitled “Regulatory & Compliance Issues Confronting Hedge Funds Today.”  During the seminar, Thompson Hine partners and other panelists discussed critical issues confronting hedge fund managers, including considerations for organizing and operating alternative mutual funds, as well as the impact on hedge fund managers of the Alternative Investment Fund Managers Directive, the Foreign Account Tax Compliance Act and the JOBS Act.  This article describes salient points on each topic discussed during the seminar.

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  • From Vol. 6 No.44 (Nov. 14, 2013)

    Bermuda Investment Funds Amendment Act 2013 Facilitates the Organisation and Operation of Hedge Funds in Bermuda

    An energetic collaboration of the Government of Bermuda, the Bermuda Monetary Authority (BMA) and the private sector in Bermuda has yielded exciting results – the passage of the Bermuda Investment Funds Amendment Act 2013 (Act).  The Act creates a new asset class known as the “Class A Exempt Fund,” which is exempt from authorisation and supervision.  The exempted product is not new to Bermuda.  However, the fact that it can be launched immediately upon filing of an exemption notification with the BMA, with no additional regulatory approval, makes it a user friendly and cost efficient alternative to competing products in the marketplace.  Once the exemption notification is filed, the exemption automatically takes effect.  In a guest article, Sarah Demerling, a partner at Appleby in Bermuda, describes the new classes of exempt funds created by the Act, the requirements that must be fulfilled to rely on the exemptions and the opportunities for hedge fund managers created by the new exemptions.

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  • From Vol. 6 No.41 (Oct. 25, 2013)

    PLI Panel Addresses Recent Developments with Respect to Prime Brokerage Arrangements, Alternative Registered Funds and Hedge Fund Manager Mergers and Acquisitions

    A recent Practising Law Institute (PLI) program provided a timely overview of current issues with respect to the establishment of prime brokerage arrangements, including the negotiation of prime brokerage agreements; mergers and acquisitions of hedge fund managers; and the formation and operation of registered funds.  This article summarizes the key points from that presentation.  The speakers were Nora M. Jordan, a partner at Davis Polk & Wardwell LLP; Harry Jho, Principal of Harry Jho LLC; and Andrew Siegel, a partner and General Counsel of Perella Weinberg Partners.

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  • From Vol. 6 No.30 (Aug. 1, 2013)

    Tax and Structuring Considerations for Funds Organized to Invest in Master Limited Partnerships

    Many businesses that operate in the energy and natural resources sector are organized as master limited partnerships (MLPs) due to favorable tax treatment, including income tax deferral for investors in the early years of their MLP investments.  Funds established to own MLPs can provide diversified exposure to the MLP sector for investors.  While many of these funds are organized as registered funds, hedge fund managers willing to establish such registered funds may be positioned to capitalize on the opportunity to attract investors interested in tax-efficient energy and natural resource investing.  See generally “How Can Hedge Fund Managers Organize and Operate Alternative Mutual Funds to Access Retail Capital (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 6 (Feb. 7, 2013).  A recent panel discussion sponsored by Ropes & Gray LLP discussed various options that are available to fund managers interested in establishing an MLP-focused fund.  Panelists, including Michael Doherty and Amy Snyder, both partners at Ropes & Gray LLP, as well as guest speaker Robert Prado, a director at PricewaterhouseCoopers LLP, addressed the tax benefits provided by MLPs and tax and structuring considerations for funds seeking to invest in MLPs.  This article summarizes the primary lessons from the panel discussion.

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  • From Vol. 6 No.26 (Jun. 27, 2013)

    SEI Report Sizes, Segments and Maps the Retail Alternatives Market

    In a recent report, SEI offered a commanding and comprehensive view of the growing market for retail alternatives such as alternative mutual funds, UCITS and related products.  See “How Can Hedge Fund Managers Organize and Operate Alternative Mutual Funds to Access Retail Capital (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 6 (Feb. 7, 2013).  The report accomplishes three important things.  First, it sizes and segments the market for retail alternatives – data that can greatly assist in sharpening marketing efforts for such products.  Second, the report catalogues the challenges faced by hedge fund managers launching retail alternative products – challenges relating to investor screening, liquidity management, distribution and fee compression, among others.  Third, the report provides a checklist of structuring and regulatory considerations for hedge fund managers looking to enter the retail alternatives market.  This article summarizes the main action points from the report.  In so doing, this article aims to serve as a reference tool for hedge fund managers looking to enter what, by all accounts, appears to be a sizable, complex and paradigm-shifting market.  See also “Dechert Partners Aisha Hunt and Richard Horowitz Discuss Strategies and Challenges for Hedge Fund Managers Wishing to Enter the Alternative Mutual Fund Space,” The Hedge Fund Law Report, Vol. 6, No. 20 (May 16, 2013).

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  • From Vol. 6 No.24 (Jun. 13, 2013)

    Application of the AIFMD to Non-EU Alternative Investment Fund Managers (Part Two of Two)

    As most fund managers who either market a fund into the European Union (EU) or manage certain EU funds now know, from July 22, 2013, the EU’s Alternative Investment Fund Managers Directive (Directive or AIFMD) will impact many non-EU managers in potentially significant ways.  The preparation required can be significant.  As a result, The Hedge Fund Law Report is publishing this two-part series designed to help non-EU private fund managers understand the steps they must take to prepare for effectiveness of the AIFMD.  The first installment focused on the impact of the Directive during the period from July 2013 through 2015 – the period that first article referred to as “Stage I,” during which non-EU managers will not be fully authorized under the Directive, but nonetheless can be subject to many parts of the Directive, depending on the scope of their activities touching the EU.  See “Application of the AIFMD to Non-EU Alternative Investment Fund Managers (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 21 (May 23, 2013).  This second installment focuses on what this article refers to as the Directive’s “Stages II and III,” which are due to come into effect in 2015 or later, which contemplate a transition to full authorization under the Directive by all fund managers that are subject to the Directive’s jurisdiction.  The authors of the series are John Adams, counsel in the Asset Management Group at Shearman & Sterling LLP; Nathan Greene, a partner and Co-Practice Group Leader in Shearman’s Asset Management Group; Christian Gloger, a senior associate in the Group; and Christine Ballantyne-Drewe, an associate in the Group.

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  • From Vol. 6 No.11 (Mar. 14, 2013)

    What Critical Issues Must Hedge Fund Managers Understand to Inform Their Preparation of Schedules K-1 for Distribution to Their Investors?

    Most hedge funds are taxed as partnerships and therefore pass through items of income, gains and losses to their fund investors, rather than facing taxation on such items at the partnership level.  As a result, hedge fund managers are responsible for preparing and distributing to their investors a Schedule K-1 to Form 1065, which shows an investor’s share of a fund’s income, gains, losses, credits and other items for each tax year that must be reported to the Internal Revenue Service on the investor’s individual income tax return.  Nonetheless, preparation of this schedule can present a litany of challenges which can confound many hedge fund managers.  Moreover, preparation of K-1s cannot be entirely outsourced to an accounting firm; a manager must understand what the accounting firm is doing and be able to evaluate its work.  Recognizing the complexity and importance of this topic, a recent webinar provided a top-level refresher course on the tax considerations that influence the structuring of hedge funds and addressed numerous issues involved in the preparation of Schedule K-1, such as the difference between “trader funds” and “investor funds,” and allocation and adjustment rules that have tax consequences for hedge fund investors.  This article summarizes key takeaways from that program.

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  • From Vol. 6 No.6 (Feb. 7, 2013)

    How Can Hedge Fund Managers Organize and Operate Alternative Mutual Funds to Access Retail Capital? (Part Two of Two)

    Alternative mutual funds present opportunities for hedge fund managers to diversify their product offerings and to attract retail investors.  At the same time, retail investors are clamoring for opportunities to invest with the most talented investment professionals, many of which are attracted to working with hedge fund firms.  However, hedge fund managers that launch alternative mutual funds face significant business challenges and regulatory concerns unique to the registered fund world.  This two-part article series is designed to familiarize hedge fund managers with alternative mutual funds and to help them determine whether it is advisable to launch such funds.  This second article details specific steps necessary to launch an alternative mutual fund; costs and fees associated with launching and operating an alternative mutual fund; distribution of alternative mutual funds; investment restrictions applicable to alternative mutual funds; and a key conflict of interest hedge fund managers face when operating alternative mutual funds and traditional hedge funds side-by-side.  The first installment discussed the structure of alternative mutual funds; the investment strategies typically employed by alternative mutual funds; why hedge fund managers consider launching alternative mutual funds; some drawbacks of launching alternative mutual funds; and the various ways in which hedge fund managers can participate in the alternative mutual fund business.  See “How Can Hedge Fund Managers Organize and Operate Alternative Mutual Funds to Access Retail Capital? (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 5 (Feb. 1, 2013).

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  • From Vol. 6 No.5 (Feb. 1, 2013)

    How Can Hedge Fund Managers Organize and Operate Alternative Mutual Funds to Access Retail Capital? (Part One of Two)

    The continuing quest for new sources of capital as well as the heightened regulation of hedge fund managers and their funds has prompted managers to explore launching alternative mutual funds.  Simultaneously, the desire for innovative investment strategies and uncorrelated returns has heightened retail investor demand for such products, according to a June 2012 report from McKinsey & Company.  See “McKinsey Analyzes Trends in the Mainstreaming of Alternative Investments and Outlines Strategic Imperatives for Traditional Asset Managers,” The Hedge Fund Law Report, Vol. 5, No. 31 (Aug. 9, 2012).  However, the organization and operation of alternative mutual funds present numerous challenges and risks for hedge fund managers – in particular, challenges and risks different from those typically encountered in the hedge fund world.  Retail is not necessarily simple, especially if you are starting with a non-retail orientation.  This two-part article series is designed to enable hedge fund managers to weigh the more salient pros and cons of launching alternative mutual funds.  This first installment discusses the structure of alternative mutual funds; the investment strategies typically employed by alternative mutual funds; why hedge fund managers consider launching alternative mutual funds; some drawbacks of launching alternative mutual funds; and the various ways in which hedge fund managers can participate in the alternative mutual fund business.  The second article will detail specific steps necessary to launch an alternative mutual fund; costs and fees associated with launching and operating an alternative mutual fund; how such funds are typically distributed; investment restrictions applicable to alternative mutual funds; and some common conflicts of interest hedge fund managers face when operating alternative mutual funds and traditional hedge funds side by side.  For analysis of an analogous side-by-side management scenario that raises its own conflicts of interest, see “How Can Hedge Fund Managers Use Reinsurance Businesses to Raise and Retain Assets and Achieve Uncorrelated Returns? (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 3 (Jan. 17, 2013) (in particular, the discussion under the heading “Compliance Policies and Procedures to Address Conflicts Raised by Side-By-Side Management”).

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  • From Vol. 5 No.43 (Nov. 15, 2012)

    Understanding the Benefits and Uses of Series LLCs for Hedge Fund Managers

    Hedge fund managers are continually striving to maximize the advantages available through their choice of legal entity for structuring their funds and management companies.  The series limited liability company (Series LLC) offers a relatively new variation on the traditional limited liability company structure that provides not only liability protection for members vis-à-vis non-members, but also liability protection for members of a given series of interests within the Series LLC vis-à-vis members of other series of interests within the same Series LLC.  In a guest article, Yehuda M. Braunstein, a Partner at Sadis & Goldberg LLP, and Todd K. Warren, Of Counsel at Sadis & Goldberg LLP, discuss: the history and evolution of the Series LLC; the various structural requirements and issues to be considered; the advantages and challenges that are presented by the Series LLC; practical tips regarding how to utilize the Series LLC; and potential uses of the structure by hedge fund managers.

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  • From Vol. 5 No.35 (Sep. 13, 2012)

    AIMA Canada Handbook Provides Roadmap for Hedge Fund Managers Doing Business in Canada

    Pershing Square’s successful proxy contest for control of Canadian Pacific Railway is the most prominent recent example, but by no means the only example, of the increasing importance of Canada for hedge fund managers.  See also “Ontario Securities Commission Sanctions Hedge Fund Manager Sextant Capital Management and its Principal for Breach of Fiduciary Duty,” The Hedge Fund Law Report, Vol. 5, No. 24 (Jun. 14, 2012).  Specifically, Canada is growing in importance as a place where hedge fund managers may invest, raise capital and recruit talent.  In an effort to assist hedge fund managers in navigating the Canadian tax and regulatory landscape, AIMA Canada, a chapter of the Alternative Investment Management Association (AIMA), recently published the AIMA Canada Handbook (Handbook).  This article summarizes the key topics covered in the Handbook, including a background discussion of the Canadian securities industry; registration requirements for fund managers operating in Canada; regulations applicable to registrants; exemptions from fund manager registration; tax consequences for hedge funds and investors; structuring Canadian hedge funds; and the outlook for the Canadian hedge fund industry, including an update on the capital raising environment.

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  • From Vol. 5 No.31 (Aug. 9, 2012)

    Structuring, Regulatory and Tax Guidance for Asia-Based Hedge Fund Managers Seeking to Raise Capital from U.S. Investors (Part One of Two)

    U.S. hedge fund investors are continuously seeking attractive investment opportunities and are increasingly expanding their search to incorporate Asia-based hedge fund managers.  At the same time, Asia-based hedge fund managers are navigating the challenging capital raising environment by reaching beyond their borders to attract U.S. investors.  However, Asia-based fund managers seeking to attract capital from U.S. investors must contend with a plethora of U.S. and foreign regulations in raising and managing such capital.  As such, Asia-based fund managers must work closely with U.S., Cayman and local counsel to develop a cohesive and carefully thought out fund and management structure, intertwining the various regulatory requirements of the applicable jurisdictions, all of which must be adhered to by the fund manager, any sub-advisers and their respective affiliates.  This is the first in a two-part series of guest articles designed to help Asia-based fund managers navigate the challenges of structuring and operating funds to appeal to U.S. fund investors.  The authors of this article series are: Peter Bilfield, a partner at Shipman & Goodwin LLP; Todd Doyle, senior tax associate at Shipman & Goodwin LLP; Michael Padarin, a partner at Walkers; and Lu Yueh Leong, a partner at Rajah & Tann LLP.  This first article describes the preferred Cayman hedge fund structures utilized by Asia-based fund managers, the management entity structures, Cayman Islands regulations of hedge funds and their managers and regulatory considerations for Singapore-based hedge fund managers.  The second article in the series will detail a number of the key U.S. tax, regulatory and other considerations that Asia-based fund managers should consider when soliciting U.S. taxable and U.S. tax-exempt investors.

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  • From Vol. 5 No.31 (Aug. 9, 2012)

    Considerations for Launching Qualified Investor Funds in Ireland: An Interview with Pat Lardner, Chief Executive of the Irish Funds Industry Association

    The popularity of Undertakings for Collective Investment in Transferrable Securities (UCITS) funds as well as the impending effectiveness of the Alternative Investment Fund Managers (AIFM) Directive has heightened the popularity of Ireland as a domicile for organizing hedge funds and alternative retail funds.  In 2011, Ireland experienced net inflows of approximately €62 billion in assets in UCITS funds, approximately €50 billion more than the second-place domicile, representing 8 percent growth over 2010.  Additionally, according to figures from the European Fund and Asset Management Association and the Central Bank of Ireland (Central Bank), Ireland-domiciled non-UCITS funds have experienced considerable growth in recent years, up 35 percent in 2010; 15 percent in 2011; and 4.3 percent in the first quarter of 2012.  Assets in Ireland-domiciled non-UCITS funds are up from €200 billion in 2010 to €250 billion as of June 2012.  Additionally, as of June 2012, the number of qualified investor funds (QIFs) climbed to an all-time high of 1,420, and assets have grown to €182 billion.  In light of this growth and the consequent importance of Ireland as a hedge fund jurisdiction, The Hedge Fund Law Report recently interviewed Pat Lardner, Chief Executive of the Irish Funds Industry Association.  The general purpose of the interview was to enable Lardner to elaborate on considerations for hedge fund managers in establishing funds and managing investments and operations in Ireland.  In particular, our interview covered, among other things: the process for organizing a UCITS fund; the service provider and reporting requirements applicable to Irish UCITS funds; the comparative advantages and disadvantages of establishing UCITS funds in Ireland; measures taken to make Irish UCITS funds more attractive to Asian and Latin American investors; recent developments impacting the appeal of UCITS funds; common mistakes made in organizing UCITS funds; advice for managers establishing Irish UCITS funds; a description of the QIF regime and the organization and fund authorization process; who constitutes a “qualifying investor” eligible to invest in a QIF; governance, service provider, reporting and regulatory examination requirements applicable to QIFs; comparative advantages and disadvantages of the QIF regime; advice for fund managers looking to establish QIFs; the new SICAV corporate structure in Ireland; and various related topics.  This article contains the full transcript of our interview with Lardner.

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  • From Vol. 5 No.31 (Aug. 9, 2012)

    New Bermuda Regulations Facilitate the Marketing of Bermuda-Domiciled Funds to Japanese Retail Investors

    On 18 December 2011, Bermuda’s Investment Funds Act, 2006 (Act), the legislation which provides the regulatory framework for the creation and operation of investment funds in Bermuda, was amended to create a new class of investment fund to be known as the “Specified Jurisdiction Fund.”  The purpose of the Specified Jurisdiction Fund classification is to permit the Ministry of Business Development and Tourism, in conjunction with the Bermuda Monetary Authority (BMA), and industry, to develop and issue, from time to time, “orders” which specifically recognize and compliment the regulatory requirements of foreign financial markets in which securities of a Bermuda-domiciled fund will be marketed.  On 8 June 2012, the Ministry of Business Development and Tourism, acting on the advice of the BMA, issued its first order under the amended Act targeting the Japanese retail market.  The order and related rules are designed to permit Bermuda-domiciled funds established pursuant to the order to be marketed to the Japanese public.  In this article, Elizabeth Denman, a counsel in the corporate department of the Bermuda office of Conyers Dill & Pearman, explains how hedge fund managers can use the order to market funds to the Japanese public.

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  • From Vol. 5 No.30 (Aug. 2, 2012)

    Considerations for Hedge Fund Managers Looking to Join Managed Account Platforms (Part One of Two)

    Following the 2008 financial crisis, hedge fund investors expressed concerns relating to a lack of liquidity, transparency and control in investing in comingled funds.  This led to an increase in the popularity of separately managed accounts, which address these concerns while allowing investors to access the investment acumen of talented hedge fund managers.  Capitalizing on the popularity of managed accounts, financial institution sponsors have built managed account platforms that provide investors with access to a variety of managers.  The platform sponsor vets participating managers, serves as a gatekeeper of the platform and provides other services.  These managed account platforms have grown in popularity, particularly with institutional investors.  As such, many hedge fund managers have considered joining such platforms as a route to increased assets under management and visibility in the institutional investor community.  This is the first article in a two-part series designed to describe what managed account platforms are and to highlight the various considerations that hedge fund managers should evaluate in determining whether to offer their services through such platforms.  This first article surveys managed account platforms, including describing the various structures for managed account platforms; the evolution of managed account platforms; and the process for adding a hedge fund manager to a managed account platform.  The second article in the series will discuss why investors find managed account platforms attractive as a method for allocating capital; considerations for hedge fund managers evaluating whether to offer their services through a managed account platform; how managers should consider which platforms to join; and certain key issues to negotiate with a platform sponsor.

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  • From Vol. 5 No.27 (Jul. 12, 2012)

    How Can Hedge Fund Managers Use Luxembourg Funds to Access Investors and Investments in Europe, Asia and Latin America?

    Luxembourg is a little country (or duchy) with a big presence in the hedge fund world.  Hedge fund managers looking to access investors or investments in Europe, Latin America or Asia have regularly turned to Luxembourg as a domicile for fund formation.  The tax and regulatory climate there is receptive to hedge funds and managers, the service provider industry is well developed and the jurisdiction is geographically close to key developing and developed markets.  Moreover, the growing popularity of funds organized as Undertakings for Collective Investment in Transferrable Securities (UCITS funds) and the impending effectiveness of the Alternative Investment Fund Managers (AIFM) Directive have increased both the attractiveness and complexity of Europe as an alternative investment jurisdiction – and, consequently, the relevance of Luxembourg.  In light of the importance of Luxembourg to many hedge fund managers, The Hedge Fund Law Report recently interviewed Marc Saluzzi and Michael Ferguson, President and Director, respectively, of the Association of the Luxembourg Fund Industry (ALFI).  The general purpose of our interview was twofold.  For HFLR subscribers that are not familiar with Luxembourg, the purpose was to highlight the benefits and downsides of Luxembourg as a hedge fund domicile.  For HFLR subscribers that are familiar with Luxembourg, the purpose was to illustrate the diverse ways in which hedge fund managers can access the various services available in Luxembourg, and the circumstances in which they should avoid Luxembourg – to illustrate, that is, the scope and limits of market practice in Luxembourg.  To effectuate these purposes, our interview with Saluzzi and Ferguson covered the following topics: the specialized investment fund (SIF) regime for hedge funds, including a discussion of the governance, service provider, reporting and regulatory audit requirements applicable to SIFs; a comparison of SIFs versus funds organized in Caribbean or other European jurisdictions; recent legal developments impacting Luxembourg-domiciled funds and managers; the establishment of a new limited partnership regime in Luxembourg; the cost of establishing a hedge fund in Luxembourg; necessary improvements to make Luxembourg a more attractive hedge fund destination; common mistakes hedge fund managers make when establishing funds in Luxembourg; advice for hedge fund managers establishing funds in Luxembourg; advantages and disadvantages of establishing funds and a manager presence in Luxembourg to address the AIFM Directive; the concept of “ManCos”; and the advantages and disadvantages of establishing UCITS funds in Luxembourg.

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  • From Vol. 5 No.24 (Jun. 14, 2012)

    How Can Hedge Fund Managers Both Advertise and Accept Investments from Non-Accredited Employees, Friends and Family Members?

    The Jumpstart Our Business Startups (JOBS) Act has been received by the hedge fund industry with cautious optimism.  Most notably, the JOBS Act eliminates the long-standing and hard-to-justify gag order prohibiting hedge fund managers from “generally soliciting,” or, in plain English, advertising.  The business benefits of advertising are obvious: communicating a value proposition; solidifying a brand; correcting misperceptions; etc.  However, the JOBS Act does not give something for nothing.  In exchange for the ability to advertise, hedge fund managers may only accept accredited investors into their funds.  See “Implications for Hedge Fund Managers of the Rule Amendments Recently Adopted by the SEC to Raise Accredited Investor Standards,” The Hedge Fund Law Report, Vol. 5, No. 1 (Jan. 5, 2012).  In the majority of circumstances, this is not an issue because the majority of investors are accredited.  But in an important minority of cases, this regime appears to require hedge fund managers to elect between advertising, on the one hand, and accepting non-accredited investors into their funds, on the other hand.  (Under Rule 506 of Regulation D, hedge fund managers may offer fund interests in a “private offering” – faster, cheaper and otherwise preferable to a “public offering” – to up to 35 non-accredited investors; and the JOBS Act does not change this part of the Rule.)  In turn, this matters because hedge fund managers sometimes have occasion to accept investments in their funds from non-accredited investors – persons such as family members, friends and lower-level employees.  While such “tickets” are typically small relative to institutional investments, they can be strategically important and even connected to institutional investments.  For example, many institutional investors like manager employees to have “skin in the game”; and this preference applies across the pecking order, to investments by star portfolio managers, operations and accounting professionals, compliance personnel, etc.  See “Investments by Hedge Fund Managers in Their Own Funds: Rationale, Amounts, Terms, Disclosure, Duty to Update and Verification,” The Hedge Fund Law Report, Vol. 3, No. 21 (May 28, 2010).  From the perspective of institutional investors focused on operational due diligence, there are no unimportant employees at a hedge fund manager.  Everyone should be invested, figuratively and, ideally, literally.  See “Legal and Operational Due Diligence Best Practices for Hedge Fund Investors,” The Hedge Fund Law Report, Vol. 5, No. 1 (Jan. 5, 2012).  So, the good news is that hedge fund managers can advertise.  The bad news appears to be that if managers advertise, they cannot accept investments from non-accredited friends, family members, employees and others, which can constitute a strategic impairment.  But hedge fund managers are not lawyers.  When confronted with two alternative options, lawyers – at least good ones – will do a thorough analysis and choose the better option.  Hedge fund managers will choose both.  Accordingly, to enable our hedge fund manager subscribers to get the best of both worlds, and to arm our attorney subscribers for conversations with managers, we have worked with sources to identify eight strategies for simultaneously advertising and accepting non-accredited investments.  Those strategies are detailed toward the end of this article.  To provide context for those strategies, this article also describes: Rule 506 and the mechanics of the JOBS Act; the impact of the JOBS Act on hedge funds and managers; the current accredited investor requirement; integration of securities offerings; and the status of SEC rulemaking under the JOBS Act.

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  • From Vol. 5 No.13 (Mar. 29, 2012)

    Managing Risk in a Changing Environment: An Interview with Proskauer Partner Christopher Wells on Hedge Fund Governance, Liquidity Management, Transparency, Tax and Risk Management

    The Hedge Fund Law Report recently interviewed Christopher M. Wells, a Partner at Proskauer Rose LLP and head of the firm’s Hedge Funds Group.  Wells has decades of experience advising hedge funds and their managers, and a broad-based practice that touches on substantially every aspect of the hedge fund business.  Our interview with Wells was similarly wide-ranging, covering topics including: hedge fund governance; investor demands for heightened transparency; co-investment opportunities; liquidity management issues; side pocketing policies and procedures; holdbacks of redemption proceeds; tax issues, including preparations for compliance with the Foreign Account Tax Compliance Act (FATCA) and the electronic delivery of Schedules K-1; and risk management, including practical steps to prevent style drift and unauthorized trading.  This interview was conducted in conjunction with the Regulatory Compliance Association’s Spring 2012 Regulation & Risk Thought Leadership Symposium.  That Symposium will be held on April 16, 2012 at the Pierre Hotel in New York.  For more information, click here.  To register, click here.  (Subscribers to The Hedge Fund Law Report are eligible for discounted registration.)  Wells is expected to participate in a session at that Symposium focusing on hedge fund governance and related issues.

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  • From Vol. 5 No.8 (Feb. 23, 2012)

    Seward & Kissel Study Highlights Trends in Hedge Fund Investment Strategies, Fee and Liquidity Terms, Fund Structures and Strategic Capital for New Managers

    While the hedge fund industry continues to be plagued by a challenging capital raising environment, a number of new hedge fund managers were able to launch advisory firms within the past year.  With that in mind, Seward & Kissel LLP conducted a survey (Seward Study) of their U.S. clients that launched hedge fund firms in 2011 to ascertain information about the hedge funds that they either launched in 2011 or are expected to launch in the first quarter of 2012.  The Seward Study focused on the types of investment strategies employed by such funds; fee and liquidity terms; fund structures; and types of strategic capital investments.  The Seward Study did not include new hedge funds launched by Seward clients that were managers with hedge fund businesses existing prior to 2011.  Nonetheless, the authors of the Seward Study believe that the funds surveyed reflect approximately 60% of the new hedge fund start-ups for 2011.  This article highlights the key findings of the Seward Study and provides additional insight as to what the data points represent in terms of hedge fund manager and investor preferences.

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  • From Vol. 5 No.5 (Feb. 2, 2012)

    How Safe Is It to Ignore Foreign Tax Claims or Judgments Against Cayman Islands Hedge Funds in the Context of a Winding Up of the Fund?

    Cayman Islands hedge funds are subject to no Cayman Islands tax of any nature, but they may become liable to foreign tax claims – for example through trading swaps – or they may become subject to judgments for tax imposed against them in other jurisdictions.  How should such claims and judgments be regarded by liquidators in the context of winding up the fund, whether in a liquidation imposed by the court, or in a voluntary liquidation?  Must effect be given to such claims or judgments, or can such claims and judgments simply be ignored, and the winding up completed without regard to them?  Or should the winding up only be completed once the tax claim or judgment has been abandoned by the foreign tax authority, or only with Cayman court sanction that the claim or judgment be disregarded for the purposes of the winding up?  In a guest article, Christopher Russell, Partner and head of the litigation and insolvency department of Ogier, Cayman Islands, and Shaun Folpp, a Managing Associate in the litigation and insolvency department of Ogier, Cayman Islands, address these and related questions.

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  • From Vol. 5 No.3 (Jan. 19, 2012)

    Corporate Governance Best Practices for Cayman Islands Hedge Funds

    With the financial crisis of 2008 and 2009, corporate governance practices in the global alternative investment funds industry came under the microscope.  While investor views on how fund directors performed during the crisis vary, what is clear a few years on is that investors, hedge fund managers and service providers have a much better understanding of the role of an independent non-executive director of an alternative investment fund and that a best practice framework has started to become a topic for active discussion in the industry.  As a result, hedge fund investors – particularly institutional investors – are increasingly scrutinizing a fund’s corporate governance structure to ensure that the directors are diligently and skillfully performing their duties in the best interest of the hedge funds on whose boards they serve.  With the global hedge fund industry having its largest presence in the Cayman Islands, this guest article looks at some of the issues relating to corporate governance from the Cayman fund perspective.  The authors of this guest article are Tim Frawley, a Partner in the Investment Funds practice of Maples and Calder, and Peter Huber, Global Co-Head of Maples Fiduciary Services.  Frawley and Huber begin with a historical accounting of Cayman company fund governance.  The authors then explain the various duties owed and roles performed by fund directors.  Next, the authors discuss the findings and implications from the Weavering Macro Fixed Income Fund Limited (In Liquidation) decision handed down last year.  The authors then move to a survey of some current hot-button issues related to fund governance, and conclude with a discussion of anticipated fund governance challenges facing hedge fund managers.

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  • From Vol. 5 No.1 (Jan. 5, 2012)

    Legal and Operational Due Diligence Best Practices for Hedge Fund Investors

    In the wake of the financial crisis in late 2008, many investors were left trapped in suspended, gated or otherwise illiquid hedge funds.  Unfortunately, for many investors who had historically taken a passive role with respect to their hedge fund investments, it took a painful lesson to learn that control over fundamental fund decisions was in the hands of hedge fund managers.  Decisions such as the power to suspend or side pocket holdings were vested in managers either directly or through their influence over the board of directors of the fund.  In these situations, which were not uncommon, leaving control in the hands of the manager rather than a more independent board gave rise to a conflict of interest.  Managers were in some cases perceived to be acting in their own self-interest at the expense, literally and figuratively, of the fund and, consequently, the investors.  The lessons from the financial crisis of 2008 reinforced the view that successful hedge fund investing requires investors to approach the manager selection process with a number of considerations in mind, including investment, risk, operational and legal considerations.  Ideally, a hedge fund investment opportunity will be structured to sufficiently protect the investor’s rights (i.e., appropriate controls and safeguards) while providing an operating environment designed to maximize investment returns.  Striking such a balance can be challenging, but as many investors learned during the financial crisis, it is a critical element of any successful hedge fund program.  The focus on hedge fund governance issues has intensified in the wake of the financial crisis, with buzz words such as “managed accounts,” “independent directors,” “tri-party custody solutions” and “transparency” now dominating the discourse.  Indeed, investor efforts to improve corporate governance and control have resulted in an altering of the old “take it or leave it” type of hedge fund documents, which have become more accommodative towards investors.  In short, in recent years investors have become more likely to negotiate with managers, and such negotiations have been more successful on average.  In a guest article, Charles Nightingale, a Legal and Regulatory Counsel for Pacific Alternative Asset Management Company, LLC (PAAMCO), and Marc Towers, a Director in PAAMCO’s Investment Operations Group, identify nine areas on which institutional investors should focus in the course of due diligence.  Within each area, Nightingale and Towers drill down on specific issues that hedge fund investors should address, questions that investors should ask and red flags of which investors should be aware.  The article is based not in theory, but in the authors’ on-the-ground experience conducting legal and operational due diligence on a wide range of hedge fund managers – across strategies, geographies and AUM sizes.  From this deep experience, the authors have extracted a series of best practices, and those practices are conveyed in this article.  One of the main themes of the article is that due diligence in the hedge fund arena is an interdisciplinary undertaking, incorporating law, regulation, operations, tax, accounting, structuring, finance and other disciplines, as well as – less tangibly – experience, judgment and a good sense of what motivates people.  Another of the themes of the article is that due diligence is a continuous process – it starts well before an investment and often lasts beyond a redemption.  This article, in short, highlights the due diligence considerations that matter to decision-makers at one of the most sophisticated allocators of capital to hedge funds.  For managers looking to raise capital or investors looking to deploy capital intelligently, the analysis in this article merits serious consideration.

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  • From Vol. 4 No.46 (Dec. 21, 2011)

    How May Hedge Fund Managers Resuscitate Expired Cayman Islands Limited Duration Exempted Limited Partnership Hedge Funds?

    Many hedge funds established as Cayman Islands exempted limited partnerships expressly provide, in their partnership agreements, a fixed term for the duration of the exempted limited partnership or a termination date upon the occurrence of a specified event.  The duration of the partnership term or the specific termination events are a matter of agreement between the partners, and such matters may, upon such terms as may be provided by the partnership agreement, be varied by agreement between the partners during the term of the exempted limited partnership.  Hedge fund managers and general partners should carefully monitor a hedge fund’s termination dates or events because once expired, resurrecting the expired exempted limited partnership will be problematic.  What if the fixed term expires by the lapse of time or the occurrence of a termination event and the partners nevertheless wish their hedge funds to continue operating?  This situation may come about by oversight of the hedge fund manager or the partners in failing to heed the impending termination date or termination event or a change of heart by the hedge fund manager and the partners, after the termination date has passed or the termination event has occurred.  Is it then open to the partners effectively to agree to resurrect and continue their expired limited partnership or must they, in any event, complete the winding up and dissolution of their exempted limited partnership and then form a new partnership with all the time, expense, inconvenience and negative tax and other consequences that this may entail?  In a guest article, Christopher Russell and Oliver Payne, partner and associate, respectively, at Ogier, Cayman Islands, first discuss the Cayman Islands regulations that relate to limited duration exempted limited partnerships.  The authors then highlight a potential course of action to extend the life of the exempted limited partnership where the partnership term has expired or a termination event has occurred.

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  • From Vol. 4 No.42 (Nov. 23, 2011)

    Speakers at Walkers Fundamentals Hedge Fund Seminar Provide Update on Hedge Fund Terms, Governance Issues and Regulatory Developments Impacting Offshore Hedge Funds

    On November 8, 2011, international law firm Walkers Global (Walkers) held its Walkers Fundamentals Hedge Fund Seminar in New York City.  Speakers at this event addressed various topics of current relevance to the hedge fund industry, including: recent trends in offshore hedge fund structures; hedge fund fees and fee negotiations; fund lock-ups; fund-level and investor-level gates; fund wind-down petitions and the appointment of fund liquidators; corporate governance issues; D&O insurance; fund manager concerns with Form PF; and offshore regulatory developments, such as proposed legislation requiring registration of certain master funds in the Cayman Islands, the EU’s Alternative Investment Fund Manager (AIFM) Directive and the British Virgin Islands (BVI) Securities & Investment Business Act (SIBA).  This article summarizes the key points discussed at the conference relating to each of the foregoing topics and others.

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  • From Vol. 4 No.38 (Oct. 27, 2011)

    Benefits and Burdens of Redomiciling a Hedge Fund to an EU Jurisdiction

    A recent report (Report) lays out the key considerations for hedge fund managers contemplating redomiciliation to the European Union (EU).  The Report is based on interviews of 49 hedge fund managers from 18 different countries, including managers who have redomiciled, managers who are thinking of redomiciling and managers who have no redomiciliation plans.  The Report catalogues the three most significant benefits driving redomiciliation, and other factors that factor into redomiciliation decisions.  The three key benefits and others mentioned in the Report and discussed herein, however, must be weighed against the flexibility and expertise of offshore funds as well as certain investors’ preferences for other, easier ways to allay their concerns.  This article catalogues the findings of the Report; describes redomiciliation mechanics; considers choice of jurisdiction arguments; describes a compromise position that may work for a range of managers that currently have offshore funds; and discusses the pros and cons of certain typically used European structures for hedge fund strategies.  See also “The Implications of UCITS IV Requirements for Asset Management Functions,” The Hedge Fund Law Report, Vol. 4, No. 36 (Oct. 13, 2011).

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  • From Vol. 4 No.38 (Oct. 27, 2011)

    Pension Funds and Sovereign Wealth Funds Shift Towards Direct Allocations with a Distinct “Sweet Spot” for Hedge Fund Managers with Between $1.0 Billion and $5.0 Billion Under Management

    A June 2011 report summarized the results of a survey (Survey) of pension and sovereign wealth fund investors as well as hedge fund managers.  The Survey had two primary goals: (1) tracking the shift of these investors from funds of funds to direct allocation models; and (2) identifying the predominant characteristics of hedge fund managers who received these newfound direct allocations.  Overall, the Survey found that the shift to direct allocation among these investors has been dramatic.  The managers who have benefited most from this transformation are those with assets under management (AUM) of between $1.0 billion and $5.0 billion, a range the Report dubs the “sweet spot.”  This article details the key findings from the Survey and the key conclusions of the Report, focusing in particular on: the factors leading to direct investing; approaches to direct investing; the three primary vehicles used by pension funds and sovereign wealth funds for direct investing; the manager selection process; criteria used by pension funds and sovereign wealth funds to evaluate direct managers; and the pivotal role of consultants.

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  • From Vol. 4 No.17 (May 20, 2011)

    Eight Refinements of the Traditional “2 and 20” Hedge Fund Fee Structure That Can Powerfully Impact Manager Compensation and Investor Returns

    In the depths of the credit crisis, investors began to question hedge funds’ traditional claims to fame.  Negative returns undermined the promise of absolute returns across market environments, and a collective downward movement in NAV challenged the notion that hedge funds consistently deliver uncorrelated returns.  Questions about fees followed promptly and inexorably from questions about returns; and a collective expectation developed that the traditional “2 and 20” hedge fund fee structure – a 2% management fee and a 20% performance allocation – would come under pressure and emerge from the crisis slimmed down to something like “1 and 10.”  But a funny thing happened on the road to recovery: the 2 and 20 model remained more or less intact.  Perhaps it was the overall robust returns of hedge funds from late 2009 through late 2010?  Or perhaps it was the argument – difficult to rebut and persuasively made by managers – that reducing fees can lead to a talent exodus and inadequate infrastructure investment, and thus works to the detriment of investors?  Or perhaps it was a combination of these and other factors?  But regardless of the reason, the fact remains: according to a recent survey by SEI and Greenwich Associates (citing data from Hedge Fund Research Inc. (HFRI)), the median management fee for single-manager hedge funds is 1.5% across all major strategies, and 40% of all hedge funds (and 100% of hedge funds following a “macro” strategy) still have a 2% management fee.  The SEI survey also found that performance fees typically remain unchanged at 20% for all major strategies.  However, fee levels are just one part of the picture of manager compensation and investor economics.  The other major determinant of what investors pay and what managers take home is fee structures.  And unlike fee levels, which have remained relatively stable, fee structures have been subject to considerable negotiation.  This article starts by discussing the structure, purpose, taxation and resilience of management fees and performance allocations.  The article then discusses in detail eight ways in which investors and managers have negotiated or renegotiated performance allocation structures.  The article concludes with a discussion of the role of investor size in negotiating for customized fee terms, and how regulation will impact such negotiations.

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  • From Vol. 4 No.7 (Feb. 25, 2011)

    Hedging into Africa through Cayman and Mauritius

    For decades, much of the African continent has been afflicted by political instability, war, famine and poverty.  Although these problems still remain for many in Africa, a number of African countries are beginning to see real economic growth and development.  Whilst it is uncertain whether events such as the current political upheaval along much of the Mediterranean coast of northern Africa or the vote for an independent state of South Sudan will hinder or spur economic growth in these particular areas, many African countries are nevertheless enjoying real economic growth and development.  As investors look to invest into Africa, they want to do so in a secure and tax efficient manner and are likely to seek out and rely on investment routes structured through reputable and internationally recognised jurisdictions.  The Cayman Islands and Mauritius tick these boxes, with both jurisdictions playing an important role in the investment process.  In a guest article, Kieran Loughran and Sonia Xavier, Partner and Associate, respectively, at Conyers Dill & Pearman, discuss, among other topics: the Cayman Islands as an efficient choice of domicile for hedge funds; Mauritius as a treaty-based jurisdiction; structuring and substance for Mauritius entities; tax advantages of Mauritius entities; and investment protection provided by Mauritius.

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  • From Vol. 4 No.4 (Feb. 3, 2011)

    How Can Liquid Hedge Funds Be Structured to Accommodate Investments in Illiquid Assets?

    During the past decade, an increasing volume of hedge fund dollars has poured into traditional liquid strategies.  As a result, market inefficiencies have narrowed or vanished, and opportunities for arbitrage – and the alpha it can generate – have grown fewer and farther between.  In response, some hedge fund managers that traditionally focused on liquid strategies started investing at least part of their funds’ capital in private equity and other illiquid securities and assets.  However, using liquid fund vehicles to invest in illiquid assets has presented a variety of problems, including those relating to: taxation, liquidity, valuation, manager compensation, strategy drift, due diligence, expectations regarding returns and regulatory scrutiny.  While there has been considerable discussion regarding the convergence of hedge funds and private equity funds, the experience and aftermath of the credit crisis indicate that the convergence discussion should be more refined.  Convergence at the fund level is problematic because illiquids do not fit naturally into a liquid fund.  Convergence at the manager level – for example, the same manager managing both private equity funds and hedge funds – is marginally more palatable, but by and large, institutional investors have demonstrated a preference for managers who stick to their knitting.  In a guest article, Philippe Simoens, Senior Manager in Tax and Strategic Business Services for Weaver, an independent certified public accounting firm, addresses some of the reasons why illiquid assets present problems when housed in liquid funds – even liquid funds purportedly structured to accommodate illiquid investments via mechanisms such as side pockets.  In the course of doing so, this article explains traditional liquid fund structuring and taxation; characteristics and taxation of marketable securities versus private equity; and structures employed by liquid funds to accommodate illiquid assets (including side pockets, lock-ups, gates and redemption suspensions).  The article concludes with thoughts on structuring for managers who traditionally have focused on liquid strategies, but who are exploring illiquid opportunities.

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  • From Vol. 4 No.2 (Jan. 14, 2011)

    Accounting for Uncertain Income Tax Positions for Investment Funds

    FIN 48, now included in ASC Topic 740 (Income Taxes) under the Financial Accounting Standards Board’s Codification, was issued in 2006 and after two one-year deferrals became effective for all entities issuing financial statements under Generally Accepted Accounting Principles (GAAP) for years beginning after December 15, 2008.  FIN 48 was issued as an interpretation of FASB Statement 109, Accounting for Income Taxes, with the intent of reducing the diversity of practice in financial accounting for income taxes, including U.S. federal, state and local taxes as well as foreign taxes.  A major component of FIN 48 is that its reach includes all statutory open tax years, not just the accounting reporting year.  This requires that each year is looked at on a cumulative basis.  Entities that report on a non-GAAP basis, such as International Financial Reporting Standards (IFRS), are not subject to FIN 48.  FIN 48 has become a hot topic for fund managers and their auditors.  Given the complicated nature of fund structures, global investment strategies and the variety of financial products that managers invest in, it is an important area, and one to which managers should allocate sufficient resources.  In a guest article, Michael Laveman, a Partner at EisnerAmper LLP, discusses in detail the four-step process for adoption of and compliance with FIN 48.

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  • From Vol. 3 No.34 (Aug. 27, 2010)

    Foundation for Accounting Education’s “2010 Hedge Funds and Alternative Investments” Conference Focuses on Taxation of Hedge Funds and Hedge Fund Managers, Structuring, Valuation, Risk Management, Due Diligence, Insurance and Regulatory Developments

    On July 29, 2010, the Foundation for Accounting Education (FAE) presented its 2010 Hedge Funds and Alternative Investments Conference in New York City.  Speakers at the one-day event focused on a range of issues impacting the hedge fund industry, including: FIN 48 (which relates to accounting for uncertain tax liabilities); ASU 2010-10 (which amends Statement of Financial Accounting Standards No. 167, which in turn requires nonpublic companies to publicly disclose their interests in variable interest entities in a similar manner to the disclosure provided by public entities); carried interest taxation developments; state and local tax developments relevant to hedge fund managers; tax implications of globalization of the hedge fund industry; special purpose vehicles; blockers; unrelated business taxable income and effectively connected income; mini-master funds; master-feeder and side-by-side structures; International Financial Reporting Standards; valuation trends; risk management; due diligence; insurance; and regulatory developments.  This article details the key points discussed during the conference.

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  • From Vol. 3 No.17 (Apr. 30, 2010)

    Implications for Hedge Funds of Changes to the British Virgin Islands’ Securities and Investment Business Act

    The British Virgin Islands (BVI) is significantly changing the regime applicable to investment business and hedge funds by the enactment of the Securities and Investment Business Act (SIBA) and the accompanying Mutual Fund Regulations (MFR).  This will affect existing private and professional funds currently recognized under the Mutual Funds Act, 1996 (MFA), which includes most hedge funds organized in the BVI.  As a result of the implementation of SIBA, the MFA will cease to apply to hedge funds in the BVI.  In a guest article, Nadia Menezes, a Senior Associate at Ogier, discusses the implications for hedge funds of the changes to the BVI’s fund regulatory regime, including consequences relating to directors, authorized representatives, minimum investments, functionaries, submission of financial statements and written notice of changes.

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  • From Vol. 3 No.16 (Apr. 23, 2010)

    Single Investor Hedge Funds Offer the Benefits of Managed Accounts and Additional Tax and Other Advantages for Hedge Fund Managers and Investors

    Managed accounts started 2010 as the ostensible antidote to many of the more egregious evils experienced by hedge fund investors over the last two years.  Managed accounts offer transparency, liquidity, control and risk management, whereas during the credit crisis, many hedge funds and other investment vehicles offered opacity, gates, lack of control and increased risk.  While the case for managed accounts is not without valid objections – including administrative cost, allocation issues and other issues discussed more fully below – managed accounts are an increasingly popular method of accessing hedge fund strategies and managers while avoiding the downsides of commingled funds.  According to a February 2010 survey conducted by Preqin, the alternative investment data provider, 16 percent of institutional investors have a current allocation to managed accounts and a further 23 percent of institutional investors are considering an initial allocation to a managed account during 2010.  Similarly, 65 percent of fund of funds managers surveyed by Preqin either operate a managed account currently or are considering doing so during 2010.  Preqin also found that larger investors are more likely to demand, and larger managers are more likely to offer, managed accounts, and that the proportion of fund of funds managers operating managed accounts is greatest in North America (60 percent), followed by Asia and rest of world (including Hong Kong, Singapore, Japan and Israel, at 44 percent) then Europe (40 percent).  Recently, various hedge fund managers have been exploring an alternative structure that effectuates many of the goals of managed accounts, while offering a number of additional benefits and avoiding at least one of the chief downsides.  That alternative structure is the single investor hedge fund – as the name implies, a hedge fund with one outside investor (in addition to the manager’s investment).  To assist hedge fund managers and investors in evaluating whether a single investor hedge fund may be an appropriate alternative to a traditional hedge fund, on the one hand, or a managed account, on the other hand, this article discusses: the definition of a managed account; the six chief benefits and eight primary burdens of managed accounts versus hedge funds; the definition of a single investor hedge fund; the six chief benefits of single investor hedge funds over managed accounts; and the two primary downsides of single investor hedge funds versus managed accounts.

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  • From Vol. 3 No.11 (Mar. 18, 2010)

    Simple Goals in a Complex World: Estate Planning for Hedge Fund Interests

    In a guest article, Steven D. Leipzig and Lori I. Wolf, both Members of law firm Cole, Schotz, Meisel, Forman & Leonard, P.A., and Steven M. Saraisky, an Associate at Cole Schotz, provide an introduction to estate planning considerations for hedge fund managers and hedge fund interests.  The authors first describe some fundamental concepts of sophisticated estate planning, and the typical structure of a hedge fund investment.  They then discuss certain approaches to estate planning with both a new hedge fund investment and an existing hedge fund investment.  The authors’ goal is to provide subscribers to The Hedge Fund Law Report with an understanding of the family planning and tax savings results that can be achieved with this kind of estate planning.

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  • From Vol. 3 No.9 (Mar. 4, 2010)

    Bill Redefining “Acquisition Indebtedness” for UBTI Purposes Could Diminish, But Likely Would Not Eliminate, Utility of “Blockers” in Hedge Fund Structures

    A significant and growing proportion of the assets invested in hedge funds globally come from U.S. tax-exempt entities such as endowments, foundations, state pension funds and corporate pension funds that are “qualified” under Internal Revenue Code (IRC) Section 501(a).  Mechanically, tax-exempt entities generally invest in a corporation organized in a low-tax or no-tax, non-U.S. jurisdiction, which in turn invests in an entity that buys and sells securities and other assets.  The buying and selling entity is often organized in a tax-advantaged, non-U.S. jurisdiction as a corporation that “checks the box” for partnership treatment for U.S. tax purposes (although other structures and entity types are also used).  See “Implications of Recent IRS Memorandum on Loan Origination Activities for Offshore Hedge Funds that Invest in U.S. Debt,” The Hedge Fund Law Report, Vol. 2, No. 41 (Oct. 15, 2009).  Tax-exempt hedge fund investors go through these contortions to avoid paying tax, at corporate tax rates, on so-called Unrelated Business Taxable Income (UBTI).  As explained in more detail in this article, the portion of interest, dividends and capital gains generated by a domestic hedge fund in a tax year based on “acquisition indebtedness” will constitute UBTI on which U.S. tax-exempt investors in that fund will owe tax at corporate rates.  Specifically, a domestic hedge fund’s UBTI for a tax year generally is equal to the fund’s total interest, dividends and capital gains for the tax year times a percentage, the numerator of which is the fund’s average acquisition indebtedness and the denominator of which is the average cost basis of the fund’s investments.  For example, if a domestic hedge fund had a total return (including interest, dividends and capital gains) for the tax year of $20 million, an average cost basis of $100 million and average acquisition indebtedness of $30 million, the fund would have $6 million of UBTI for the tax year.  That UBTI would be allocated pro rata to the fund’s tax-exempt investors for tax purposes.  So if the fund had two tax-exempt investors with equal investments, at a corporate tax of 35%, each would owe tax of $1.05 million on its distributive share of the fund’s UBTI for the tax year.  By contrast, if a tax-exempt investor invests in a corporation that in turn invests in a lower-tier trading entity, the UBTI created by the trading entity’s acquisition indebtedness will not flow through to the tax-exempt investor, and the investor will not owe tax on the UBTI (unless the investor’s purchase of shares in the corporation was itself financed by acquisition indebtedness).  This is because the Internal Revenue Service respects the ability of corporations to “block” UBTI.  See “IRS ‘Managed Funds Audit Team’ Steps Up Audits of Hedge Funds and Hedge Fund Managers, and Investigations of Hedge Fund Tax Compliance Issues,” The Hedge Fund Law Report, Vol. 2, No. 34 (Aug. 27, 2009).  On July 31, 2009, Rep. Sander Levin (D-MI) introduced H.R. 3497, a bill that would revise the definition in the IRC of “acquisition indebtedness” to exclude debt incurred by a U.S. partnership for investments in “qualified securities or commodities.”  (Levin had introduced similar legislation in 2007.)  In short, if Levin’s bill were to become law, it would diminish the rationale for investments by U.S. tax-exempt investors in hedge funds via offshore corporations.  However, offshore corporations exist in hedge fund structures for reasons other than blocking UBTI, so even if Levin’s bill were to become law, the case for offshore corporations could remain compelling.  This article offers a more comprehensive discussion of the taxation of UBTI; tax-exempt investor attitudes towards UBTI; structuring of hedge funds to enable tax-exempt investors to avoid UBTI; the mechanics of the Levin bill; the potential impact of the Levin bill if enacted on tax-exempt hedge fund investors as well as non-U.S. investors; and the likelihood of enactment of the Levin bill.

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  • From Vol. 3 No.8 (Feb. 25, 2010)

    Interview with Timothy Spangler: Key Legal and Business Considerations when Launching Hedge Funds or Hedge Fund Managers in China

    In February 2010, People’s Republic of China (PRC)-based investment management firm Munsun Asset Management Limited and its founder, Li Xianghong, announced the launch of the firm's first China-focused hedge fund, Munsun China Opportunity Investment Fund (Munsun fund).  The investment objective of the Munsun fund is to invest in a portfolio consisting primarily of securities of companies established or operating in the Greater China Region, and of companies listed on stock exchanges in Hong Kong, New York, London and Singapore that do business in or are connected to China.  Timothy Spangler, who advised on the launch, recently spoke with The Hedge Fund Law Report about the launch and structuring of the Munsun fund, and what lessons the launch offers for hedge fund managers and investors that are contemplating launching or investing in hedge funds in or focused on China.  In particular, we spoke to Spangler about: the structure of the Munsun fund and advisory entity; the chief business advantages of organizing a hedge fund adviser or a hedge fund in China; the key legal or regulatory hurdles faced in structuring and marketing the Munsun fund; marketing benefits to organizing a fund or adviser in China; licenses required to manage a hedge fund organized in China; laws governing liquidity of Chinese funds; currency issues; the make-up of the Munsun fund investor base; and tax considerations.  The full transcript of that interview is included in this issue of The Hedge Fund Law Report.  See also “Do Collective Investment Management Schemes Offer a Means for Hedge Fund Managers to Access the Potentially Vast China Market?,” The Hedge Fund Law Report, Vol. 2, No. 36 (Sep. 9, 2009).

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  • From Vol. 3 No.5 (Feb. 4, 2010)

    How Can Hedge Fund Managers Structure Managed Accounts to Remain Outside the Purview of the Amended Custody Rule’s Surprise Examination Requirement?

    Under the amended custody rule, a registered hedge fund manager that has custody of client assets is required to undergo an annual surprise examination unless it is eligible for one or more of three exceptions from the surprise examination requirement.  Generally, an adviser is deemed to have custody under the amended rule in any of four circumstances: if (1) it maintains physical custody of client funds or securities; (2) it has the authority to obtain client funds or securities, for example, by deducting advisory fees from a client’s account or otherwise withdrawing funds from a client’s account; (3) it acts in a capacity that gives it legal ownership of or access to client funds or securities (for example, where it acts as general partner of a limited partnership); or (4) client funds or securities are held directly or indirectly by a “related person” of the adviser.  However, even if an adviser is deemed to have custody for any of the foregoing reasons, it would not be subject to the annual surprise examination requirement if it were eligible for any of the following three exceptions: (1) if it is deemed to have custody solely based on its fee deduction authority; (2) to the extent it advises pooled investment vehicles that deliver annual audited financial statements (prepared by an independent, PCAOB-registered accountant) to investors in the pool within 120 days of the end of the pool’s fiscal year (180 days for funds of funds); or (3) if it is deemed to have custody solely based on custody by a “related person” and that related person is “operationally independent” of the adviser.  For a thoroughgoing discussion of the mechanics of the amended custody rule, see “How Does the Amended Custody Rule Change the Balance of Power Between Hedge Fund Managers and Accountants?,” The Hedge Fund Law Report, Vol. 3, No. 4 (Jan. 27, 2010).  Accordingly, most registered hedge fund managers would not be subject to the surprise examination requirement, with respect to hedge funds under management, because they would be eligible for the “pooled investment vehicle” exception.  However, to the extent a hedge fund manager also manages managed accounts, the manager would not be eligible for the pooled investment vehicle exception with respect to those managed accounts.  There are at least two reasons for this: (1) the typical managed account only has one investor, and thus is not “pooled” within the meaning of the amended custody rule; and (2) generally, hedge fund managers do not distribute audited financial statements to managed account investors (though such investors often conduct their own audits of the account).  See “How Should Hedge Fund Managers Revise Their Compliance Policies and Procedures in Light of Amendments to the Custody Rule?,” The Hedge Fund Law Report, Vol. 3, No. 3 (Jan. 20, 2010).  Therefore, a hedge fund manager may only avoid the annual surprise examination requirement with respect to any managed accounts under management if: (1) it is not deemed to have custody of the funds or securities in the managed accounts; or (2) it is eligible for an exception from the surprise examination requirement other than the pooled investment vehicle exception.  The problem is, many managed accounts are structured and operated in ways that would cause their managers to be deemed to have custody and would render their managers ineligible for any exception.  For example, if a hedge fund manager has authority to deduct fees from the managed account and custodies the managed account assets at an affiliate of the manager that is not operationally independent of the manager, the manager would not be eligible for any exception.  See “SEC Adopts Investment Adviser Custody Rule Amendments,” The Hedge Fund Law Report, Vol. 3, No. 1 (Jan. 6, 2010).  Given the intrusiveness, expense and potential reputational harm arising out of surprise examinations, this article examines how managed accounts may be structured so that the manager will not be deemed to have custody of the assets in the account.  (The urgency of such avoidance is compounded by the growing chorus of calls from institutional investors for exposure to hedge fund strategies via managed accounts.)  In particular, the remainder of this article details: precisely what a managed account is (including the use of segregated portfolio companies in the Cayman Islands); the benefits of managed accounts; the drawbacks of managed accounts; how managed accounts can be structured and documented to avoid imputing custody of the assets in the account to the manager, or to ensure that the manager remains eligible for the fee deduction exception to the surprise examination requirement; the special case of private securities and illiquid assets; and special purpose vehicle considerations.

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  • From Vol. 3 No.5 (Feb. 4, 2010)

    Offshore Fund Vehicles: Do U.S. Investment Managers Need Them?

    With the green shoots of recovery beginning to emerge in the U.S. and significant amounts of capital withdrawn during the last twelve months beginning to be redeployed back into fund structures, should U.S. investment managers now be looking to establish offshore fund vehicles?  If so, what sources of capital should U.S. investments managers be looking to attract to invest into these offshore fund vehicles?  Additionally, with offshore jurisdictions subjected to more scrutiny than ever before, which jurisdictions should U.S. investment managers be looking to go to in order to domicile their offshore fund vehicles?  These are all important questions which U.S. investment managers and their advisors are frequently asking and which are worthy of consideration and analysis.  In a guest article, Ogier Partner Simon Schilder addresses these questions and discusses: the rationale for organizing offshore investment vehicles; potential changes to the unrelated business taxable income rules; the Alternative Investment Fund Manager Directive in the European Union; and considerations when selecting an offshore jurisdiction for organization of a hedge fund.

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  • From Vol. 3 No.1 (Jan. 6, 2010)

    Local Currency Hedge Funds Expand Marketing and Investment Opportunities, but Involve Currency Hedging and Other Challenges

    Traditionally, hedge funds have scoured the globe for investments.  To an increasing degree, hedge funds are scouring the globe for investors.  There are various macroeconomic reasons for this trend, including but not limited to: political and economic progress in developing countries generally and the so-called BRIC (Brazil, Russia, India, China) countries specifically; high savings rates, especially in China and Japan; the recent credit crisis, and the resulting loss of wealth in the U.S. and Eurozone countries; record deficit spending in the U.S., and resulting concerns about inflation and interest rates; etc.  At a more practical level, 2008 and 2009 witnessed significant outflows from hedge funds, and managers have been looking for new capital wherever they can find it – even if that new capital comes from places other than the usual suspect jurisdictions.  As more hedge fund capital comes from more places, hedge fund managers have been exploring and, in some cases, launching funds denominated in local currencies.  Local currency hedge funds have two chief advantages over funds denominated in U.S. Dollars or another “reserve” currency: they facilitate marketing to a wider range of institutions and individuals, and they enable investments in assets that otherwise would be inaccessible or difficult to access.  In addition, local currency funds enable managers to avoid, in some cases, certain of the administrative and legal brain damage involved in other approaches to managing currency issues.  At the same time, local currency funds implicate certain unique risks.  This article describes the four primary ways in which hedge fund managers approach multicurrency issues, one of which involves the use of local currency funds, and details the risks and benefits of each.  In particular, this article drills down on the practical and legal challenges involved in hedging currency risk, and discusses the special case of China’s new limited partnership law.

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  • From Vol. 2 No.45 (Nov. 11, 2009)

    Hedge Fund Managers Considering Fund Appreciation Rights Compensation Structures to Defer Tax on Performance Compensation and to Better Align Manager and Investor Incentives

    In the public company context, before stock options got a bad name via backdating scandals and unintended consequences (a skewing of incentives towards the short-term, unintended windfalls, etc.), they were seen as a potent tool for mitigating the adverse effects of the oft-bemoaned separation of ownership and control.  Executive compensation debates, however, are not the exclusive province of commentators on public companies.  The credit crisis focused the attention of hedge fund investors on executive compensation at hedge fund managers in a way that good times never could.  See “Addressing (and Resisting) Demands for Changes in Hedge Fund Manager Compensation,” The Hedge Fund Law Report, Vol. 2, No. 16 (Apr. 23, 2009).  As distinct from discussions of executive compensation at public companies, where the chief criticism often relates to the absolute level of compensation, hedge fund manager compensation discussions more often relate to the structure of compensation.  In particular, one of the primary criticisms leveled during the credit crisis was that measuring performance fees over one year failed adequately to reflect the reality of most hedge fund investment strategies, which require more than one year for realization.  Similarly, the idea of measuring performance compensation over a single year has been criticized as incentivizing managers to take undue risks and for potentially rewarding negative performance over multiple years.  In an effort to better align the incentives of managers and investors, hedge fund managers have been evaluating the viability of fund appreciation rights (FARs), which offer a mechanism of manager compensation analogous to stock options.  This article explores this provocative compensation structure, and includes analysis of: the mechanics of FARs; the analogy to call options; how FARs may offer the potential to better align the incentives of managers and investors; the clawback mechanism often built into FARs; a numerical example of how a FARs structure could operate in practice; how FARs can help retain talent, especially in lean years; whether FARs can be used in existing funds in addition to new funds; whether FARs can be used in domestic funds in addition to offshore funds; the tax consequences of FARs; and the market interest in FARs.

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  • From Vol. 2 No.37 (Sep. 17, 2009)

    The Evolution of Offshore Investment Funds (Part Three of Three): In Interview with The Hedge Fund Law Report, Ogier Partner Colin MacKay Discusses Cross-Border Regulation; Transparency in Various Offshore Financial Centers; Preferred Offshore Financial Centers for Organizing Hedge Funds; Audits and Examinations of Offshore Financial Centers by Global Regulatory Bodies; and How Hedge Fund Managers Can Access Regulatory Findings

    During this past spring and summer, global law firm Ogier hosted its Second Annual Ogier Global Investment Funds Seminar, titled “The Evolution of Offshore Investment Funds,” for over 300 hedge fund professionals in New York, Boston, the Cayman Islands, Chicago and San Francisco.  Colin MacKay, one of the presenting partners at the seminar, spoke at length to The Hedge Fund Law Report about the most important issues addressed in the seminar.  In prior issues, we published the first two of three parts of the full transcript.  This week’s issue of The Hedge Fund Law Report includes part three of three of the full transcript, in which MacKay discusses cross-border regulation; the definition of “established operations”; transparency in various offshore financial centers (including the Cayman Islands, BVI, the Channel Islands and Bermuda); which offshore financial centers are more risky for organizing hedge funds; which offshore financial centers hedge funds are likely to migrate to based on their ability to meet international standards of transparency; whether global regulatory bodies such as the Organization for Economic Cooperation and Development and the International Organization of Securities Commissions are merely promulgating standards or whether they are actively examining or auditing the regulatory and tax rules and enforcement of those rules in offshore financial centers; and how hedge funds can access the results of examination and audit work conducted by regulators.

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  • From Vol. 2 No.36 (Sep. 9, 2009)

    Do Collective Investment Management Schemes Offer a Means for Hedge Fund Managers to Access the Potentially Vast China Market?

    For many hedge fund managers, China represents an enormous investment management opportunity.  However, China’s extensive capital controls have, to a degree, impeded entry into the potentially sizeable market.  To access the opportunity in a manner consistent with relevant capital controls, investment managers recently have been evaluating the potential use of collective investment management schemes (CIMs) as a means of managing assets in China.  Although hedge fund managers may not currently manage a Chinese CIM, the CIM industry in China is young and has been compared to the nascent hedge fund industry in the U.S. in the 1960s.  CIM industry observers predict that as time passes and the CIM industry matures, Chinese CIMs will increase in number and size.  As a result, hedge fund managers active in the China market or considering entering it may benefit from a thorough analysis of the relevant business and regulatory considerations raised by CIMs.  This article provides that analysis.

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  • From Vol. 2 No.35 (Sep. 2, 2009)

    Will Increased Tax Rates and More Onerous Regulation Cause Hedge Fund Managers to Leave London?

    London is one of the world’s premier centers of hedge fund management.  A recent ranking of the world’s 11 most successful hedge fund managers listed two headquartered in London: Winton Capital Management and Brevan Howard Asset Management.  But there has been, for months now, a good deal of talk about an exodus of hedge fund managers from the U.K.  That talk has been fueled by two factors: recent tax law changes and the European Commission’s proposed Alternative Investment Fund Managers Directive (Draft Directive).  We detail the tax law changes, and analyze whether they and the Draft Directive really have the potential to engender the much-discussed flight, or whether such flight constitutes an exaggerated threat.

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  • From Vol. 2 No.33 (Aug. 19, 2009)

    How Are Hedge Fund Managers with Funds Under their High Water Marks Renegotiating Performance Fees or Allocations?

    Despite solid year-to-date performance, many hedge funds remain below their prior net asset values (NAVs), in many cases achieved during the first half of 2007.  As a technical matter, the governing documents of most hedge funds contain so-called high water mark or loss carry-forward provisions stating that the manager cannot collect a performance fee or allocation until the NAV of the fund exceeds its highest prior level.  But as a practical matter, the performance fee is a critical part of the hedge fund business model.  Among other things, performance fees enable managers to offer the compensation packages required to attract and retain top investment and other talent; and such talent is necessary to offer the incremental advantages in terms of insight and analysis that distinguish one hedge fund from another – that enable one fund to yield alpha while others just deliver beta or losses.  And hedge fund investors recognize this: by and large, they are invested in hedge funds for uncorrelated, absolute returns.  They’re not in hedge funds – at least primarily – to save money on fees.  (Fee saving is what bond and stock index funds are for.)  Investors want their managers incentivized, and thus investors have generally been willing to negotiate alternative arrangements with respect to performance fees or allocations with managers whose funds are below their high water marks.  In a sense, the experience of the past year and a half has demonstrated that high water mark provisions in hedge fund documents do not provide a roadmap for how the relationship between hedge fund managers and investors actually operates.  Rather, such provisions provide a starting position for negotiations between hedge fund managers and investors with respect to performance fees or allocations so long as a manager’s best days remain, at least for the moment, behind him or her.  This article explores what performance fees and allocations are (including a discussion of the tax purpose and effect of mini-master funds); how high water mark provisions affect a manager’s ability to collect such compensation; specific ways in which managers and investors are renegotiating performance fees or allocations in the “shadow” of high water mark provisions; the rationale among managers for seeking, and among investors for consenting to, such revised performance fee or allocation arrangements; and the process for obtaining consent to such revised arrangements, and the circumstances in which negative consent may be viable.

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  • From Vol. 2 No.31 (Aug. 5, 2009)

    The Evolution of Offshore Investment Funds (Part Two of Three): In Interview with The Hedge Fund Law Report, Ogier Partner Colin MacKay Discusses Indemnification; Evolution of the “Gross Negligence” Standard for Directors; Caselaw on When a Redeeming Shareholder Becomes a Creditor of a Hedge Fund and Efforts by Liquidators to Adjust Net Asset Value; and Clawback Principles and Mechanics

    During this past spring and summer, global law firm Ogier hosted its Second Annual Ogier Global Investment Funds Seminar, titled “The Evolution of Offshore Investment Funds,” for over 300 hedge fund professionals in New York, Boston, the Cayman Islands, Chicago and San Francisco.  Colin MacKay, one of the presenting partners at the seminar, spoke at length to The Hedge Fund Law Report about the most important issues addressed in the seminar.  Last week, we published the first of three parts of the full transcript.  In that first installment, MacKay discussed, among other things: drafting of offshore fund documents; net asset value (NAV) adjustments; clawbacks; managed accounts; and payment-in-kind provisions.  See “The Evolution of Offshore Investment Funds (Part One of Three): In Interview with The Hedge Fund Law Report, Ogier Partner Colin MacKay Discusses Drafting of Offshore Fund Documents; NAV Adjustments; Clawbacks; Managed Accounts; and Payment-in-Kind Provisions,” The Hedge Fund Law Report, Vol. 2, No. 30 (Jul. 29, 2009).  This week’s issue of The Hedge Fund Law Report includes part two of the full transcript, in which MacKay discusses indemnification of fund directors and the evolution of the “gross negligence” standard; the most relevant caselaw developments in offshore financial centers (including cases addressing when a redeeming shareholder becomes a creditor of a fund and cases dealing with attempts by liquidators to adjust NAV); and clawback principles and mechanics (including an extensive discussion of why a Cayman court may not enforce a clawback action by a U.S. bankruptcy trustee in circumstances such as the Madoff fraud).

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  • From Vol. 2 No.30 (Jul. 29, 2009)

    The Evolution of Offshore Investment Funds (Part One of Three): In Interview with The Hedge Fund Law Report, Ogier Partner Colin MacKay Discusses Drafting of Offshore Fund Documents; NAV Adjustments; Clawbacks; Managed Accounts; and Payment-in-Kind Provisions

    During this past spring and summer, global law firm Ogier hosted its Second Annual Ogier Global Investment Funds Seminar, titled “The Evolution of Offshore Investment Funds,” for over 300 hedge fund professionals in New York, Boston, the Cayman Islands, Chicago and San Francisco.  Colin MacKay, one of the presenting partners at the seminar, spoke at length to The Hedge Fund Law Report about the most important issues addressed in the seminar, including: (1) How regulatory developments, recent economic events and caselaw in offshore financial centers is affecting drafting of specific provisions in fund documents (including net asset value adjustments, “clawbacks” of performance fees for subsequent underperformance); (2) Managed accounts, and the amount of assets required to be in a managed account for such an account to be economically viable, in light of the various administrative costs involved in creating and maintaining such an account; (3) Side letters; (4) Liquidity management tools (such as gates, redemption suspensions, payments in kind, etc.), and how the increasing use of such tools is affecting the drafting of payment-in-kind provisions in Cayman and BVI fund documents; (5) Indemnification of fund directors and the evolution of the “gross negligence” standard; (6) Caselaw developments in offshore financial centers (including cases addressing when a redeeming shareholder becomes a creditor of a fund and cases dealing with attempts by liquidators to adjust net asset value); (7) Clawback principles and mechanics; (8) Regulatory developments in offshore financial centers, and in other jurisdictions that may affect funds organized in offshore financial centers (such as the EU’s AIFM Directive); and (9) The relative advantages and disadvantages of various offshore financial centers.  This issue of The Hedge Fund Law Report includes the first of three parts of the full transcript of our interview with MacKay.

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  • From Vol. 2 No.22 (Jun. 3, 2009)

    Hedge Fund Managers Using “Mini-Master Funds” to Retain Favorable Tax Treatment of Performance-Based Revenue from Offshore Funds

    With the passage last year of legislation eliminating the ability of U.S. hedge fund managers to defer taxes on fee income from their offshore funds, managers are increasingly employing so-called “mini-master funds” to obtain a different kind of favorable tax treatment for the same revenue.  Traditionally, in a master-feeder structure, managers would enter into an investment management agreement with the offshore fund, which in turn would invest substantially all of its assets (from non-U.S. and U.S. tax-exempt investors) in a master fund.  The investment manager would charge the offshore fund a “performance fee” of 20 percent of the gains on its investment in the master fund.  Before last year, managers were able to defer tax on the performance fee by reinvesting it in the offshore fund.  However, Internal Revenue Code Section 457A, adopted as part of the Emergency Economic Stabilization Act of 2008, disallows such fee deferrals and requires hedge fund managers to take all existing deferrals into income by 2017.  Mini-master funds seek to circumvent this rule by converting the performance “fee” into a performance “allocation.”  We explain precisely how mini-masters can accomplish this, and in the course of our discussion explore traditional fee deferrals, the operation of Section 457A, the tax effect of mini-masters, jurisdictional issues and what proposals relating to the taxation of carried interest may mean for the continued utility of mini-masters.  See “IRS Releases Further Guidance Affecting Offshore Hedge Fund And Other Pooled Investment Vehicle Deferrals,” The Hedge Fund Law Report, Vol. 2, No. 6 (Feb. 12, 2009).

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  • From Vol. 2 No.17 (Apr. 30, 2009)

    IndexIQ Launches “Hedged” Exchange-Traded Funds

    An exchange-traded fund (or ETF) is essentially an investment vehicle with mutual fund features which trades on stock exchanges like a stock.  An ETF holds assets such as stocks or bonds and trades at approximately the same price as the net asset value (NAV) of its underlying assets over the course of the trading day.  As a result, an ETF investment provides the flexibility of a stock and the diversification of an index fund.  Recently, IndexIQ, a New York based investment firm, expanded the ETF universe when it launched the first ever U.S. hedge fund index-linked ETF in March, which offers the benefits of hedge fund investments to the public via ETFs, and then filed a registration statement for fifteen additional hedge fund replication ETFs in April 2009.  We review the filing, including a discussion of the advantages of hedge fund ETFs over actual hedge funds, and the relevant risk factors.

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  • From Vol. 2 No.15 (Apr. 16, 2009)

    Hedge Fund Managers Launching Mutual Funds in an Effort to Stay a Step Ahead of Regulatory Convergence

    Although the term “hedge fund” has no statutory or common law definition, historically hedge funds have been defined in large part by what they are not: mutual funds.  Unlike mutual funds, hedge funds have been exempt from the definition of “investment company” under the Investment Company Act of 1940, and unlike mutual fund advisers, hedge fund advisers have not been required to register under the Investment Advisers Act of 1940.  Free from many regulatory restrictions that bind registered funds and advisers, the hedge fund format has been understood as a blank canvas on which a creative manager can realize his or her full investment potential; and the historical returns of some managers have borne out that understanding.  However, in a potent sign of the extent to which the challenging economic climate has changed the hedge fund industry, hedge funds managers are now engaging in a move formerly considered unthinkable – they are launching mutual funds.  While there are various reasons for this trend, two macro variables are largely responsible.  First, the negative feedback loop of poor performance and redemptions that has virtually halved the capital base of the industry.  Without capital there are no hedge funds – or mutual funds – and so hedge fund managers are looking for new sources of capital to fill the holes left by redemptions, even if that new capital generates lower fees.  Second, the increasing likelihood, perhaps inevitability, of regulatory convergence between hedge funds and mutual funds, and their respective managers.  Bills presently before Congress would subject hedge funds and their managers to many of the regulations currently applicable to mutual funds and their managers.  If such bills pass – and the consensus view is that they will, though likely with modifications from their current forms – then the regulatory playing field will be leveled and the legal advantages of running a hedge fund over a mutual fund will largely disappear.  In this sense, launching a mutual fund constitutes a recognition by a hedge fund manager of what may well be a legal fait accompli, and an effort to capitalize (from a marketing perspective) on the “aura” of being a hedge fund manager while that still means something in the retail imagination.  We discuss the convergence trend, the benefits and burdens to hedge fund managers of running a mutual fund, which hedge fund strategies lend themselves to mutual fund structures, allocation and marketing considerations and competition issues.

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  • From Vol. 2 No.14 (Apr. 9, 2009)

    Congress Introduces Legislation That Would Tax Offshore Hedge Funds as U.S. Corporations

    On March 2, 2009, Senator Carl Levin (D-Michigan) introduced the Stop Tax Haven Abuse Bill of 2009 (the Bill).  A similar bill was introduced in the Senate in 2007 (co-sponsored by then-Senator Barack Obama), but was not acted upon.  The Bill, like its 2007 predecessor, contains numerous provisions generally intended to prevent U.S. taxpayers from holding assets in accounts of financial institutions located in so-called tax havens without disclosing the existence of those accounts to the Internal Revenue Service.  The Bill, however, also contains an onerous provision (Section 103) which would cause hedge funds incorporated outside the United States, but managed from within the United States, to become subject to full U.S. corporate income tax.  In a guest article, Jeremy Naylor, a Partner at White & Case, explains the mechanics of the bill, its potential effect on offshore hedge funds and why Senator Levin’s rationale in proposing the Bill may be at odds with the reality of the current tax law as applied to hedge funds.

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  • From Vol. 2 No.11 (Mar. 18, 2009)

    Proposed Tax Legislation Affecting Hedge Funds

    Bills introduced this month in both the House and the Senate contain two provisions that are of particular significance to hedge funds.  One provision would materially alter the tax treatment of offshore hedge funds with U.S.-based managers, and the other provision would change the tax treatment of “dividend equivalent” payments made on notional principal contracts (or “swaps”) that reference U.S. stocks.  The proposed legislation, which was introduced by Senator Carl Levin (D-Michigan) and Representative Lloyd Doggett (D-Texas), contains various other provisions, including the addition of certain reporting requirements, as well as certain presumptions to be applied in judicial and administrative proceedings, with respect to amounts derived by U.S. persons from offshore entities.  In a guest article, Mary Conway, Lucy W. Farr and Rachel D. Kleinberg, all partners of Davis Polk & Wardwell’s Tax Department, explain the two provisions and the implications of the provisions for hedge funds.

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  • From Vol. 2 No.9 (Mar. 4, 2009)

    Financial Crisis to Slow Convergence of Hedge Funds and Private Equity Funds, But Not for Long

    Two of the most significant types of alternative investment funds worldwide are hedge funds and private equity funds.  For years, these two alternative investment strategies have been converging.  Although the financial crisis may slow this convergence, the trend will ultimately continue and strengthen – albeit with some important variations across countries.  In a contributed article, Houman B. Shadab, senior research fellow in the Regulatory Studies Program at the Mercatus Center at George Mason University, examines the impact of the financial crisis on convergence, explains the distinction between “strategic” and “structural” convergence, discusses the convergence that already has occurred in distressed debt investing and emphasizes the importance to the pace and shape of convergence of variations in regulatory approaches across jurisdictions.

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  • From Vol. 2 No.8 (Feb. 26, 2009)

    Investors in Hedge Fund Strategies Increasingly Demanding Separate Accounts to Avoid Gates and Other Consequences of Commingled Investment Vehicles

    Faltering hedge fund performance, high profile frauds and prime broker and counterparty failures have combined to heighten the sensitivity of investors in hedge fund strategies to the type of vehicle in which their assets are invested.  In particular, recent events have highlighted the pitfalls to an investor of commingling its assets with those of other hedge fund investors.  One of the major concerns centers around the timing and quantity of redemptions: in a hedge fund, a substantial, simultaneous volume of redemptions can cause a manager to lower a gate or otherwise restrict withdrawals, or leave remaining investors with less liquid assets – and thus redemptions by one investor can decrease the liquidity of other investors.  Side letters are one way to address the concerns raised by commingled assets.  But regulators and even managers are looking increasingly askance on such arrangements.  Another method used to address these concerns involves investors investing in separate accounts, which often invest alongside or otherwise participate in the investment program of a related hedge fund.  We explain, among other things, the various forms a separate account may take, the potentially adverse Advisers Act consequences allowing investors to participate in a strategy via separate accounts and an alternative to separate accounts being used by managers with increasing frequency.

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  • From Vol. 2 No.6 (Feb. 12, 2009)

    IRS Releases Further Guidance Affecting Offshore Hedge Fund And Other Pooled Investment Vehicle Deferrals

    On January 8, 2009, the Internal Revenue Service issued interim guidance (Notice 2009-8) under Internal Revenue Code Section 457A.  Enacted in October 2008, Section 457A largely eliminates compensation deferrals by nonqualified entities – in general, tax-indifferent non-U.S. corporations or partnerships (U.S. or non-U.S.) with tax-indifferent partners.  In a guest article, Jonathan M. Zorn, Brett A. Robbins and Lucas Rachuba describe the mechanics of the interim guidance – including a discussion of the treatment of deferrals attributable to periods before and after January 1, 2009 – and explain how the interim guidance may impact hedge funds and their managers.

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  • From Vol. 1 No.23 (Oct. 28, 2008)

    The End of Deferral As We Know It: The New Rules Prohibiting the Deferral of Compensation Paid to U.S. Managers By Off-Shore Hedge Funds

    On October 3, 2008, Congress enacted, and President Bush signed, legislation that will curtail deferral of compensation payable by off-shore funds to U.S. managers beginning in 2009, and require that income previously deferred be recognized no later than 2017. In a guest column, Mark Leeds and Yoram Keinan, Partner and Of Counsel, respectively, at Greenberg Traurig, LLP, offer a thorough analysis of the mechanics of the new legislation and what it means for hedge fund managers in structuring their funds and compensation arrangements.

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  • From Vol. 1 No.19 (Aug. 21, 2008)

    Quick, Easy and Wrong: Congress Considers Legislation to Curtail Energy Trading and the Use of Off-shore Blockers

    On August 1, 2008, Senators Ron Wyden (D-Ore.) and Charles Grassley (R-Iowa) proposed legislation that would make the tax code even more complicated and obtuse and would curtail the use of so-called “foreign blockers” by tax-exempt investors.  The one sentence take-away on the Wyden-Grassley bill is that it would eliminate long-term capital gains treatment, as well as preferential treatment for tax-exempt entities, on profits from investments in the oil and gas markets, beginning in 2008.  In this article, guest contributors Mark Leeds and Rita Cameron, shareholder and associate, respectively, at Greenberg Traurig, provide a lucid, informed and critical analysis of the proposal.  In their view, the proposal could have a profound and adverse effect on tax-exempt US investors in offshore hedge funds.  In the worst case scenario, it could even trigger provisions sometimes found in offshore feeder documents that allow tax-exempt investors to redeem if there is a change in law (or in some cases even a proposed change in law) that would adversely affect the tax treatment of their investments.  On the positive side, the proposal has only a slim chance of becoming law, at least in its current form.

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  • From Vol. 1 No.16 (Jul. 22, 2008)

    An IRS Trifecta: Three Public Releases Affecting Hedge Funds and Funds of Funds Issued on One Day

    A triumvirate of IRS releases all issued on July 3, 2008 clarify the deductibility of hedge fund investment interest expenses by hedge fund investors, and the tax treatment of fund of funds management fees. Guest contributor Mark H. Leeds, a Shareholder of Greenberg Traurig LLP, explains the releases in a lucid, insightful and timely article.

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  • From Vol. 1 No.14 (Jun. 19, 2008)

    Cayman Islands Monetary Authority Issues Report on Hedge Fund Statistics

    Earlier this month, the Cayman Islands Monetary Authority issued the first annual Investments Statistical Digest containing statistics on 5,052 Cayman-domiciled hedge funds.

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  • From Vol. 1 No.12 (May 20, 2008)

    House Passes Tax Provision Targeting Hedge Fund Fee Arrangements

    • Legislation that would eliminate the ability of US hedge fund managers to defer paying tax on management and performance fees from offshore hedge funds cleared the House of Representatives on May 21, 2008.
    • Disputes over PAYGO in the Senate and a threatened White House veto likely will impede passage of this particular bill. However, the appearance in Congress of multiple legislative proposals targeting offshore fee deferrals, combined with the current media spotlight on hedge fund fee arrangements, increase the likelihood of passage of legislation curtailing offshore fee deferrals.
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  • From Vol. 1 No.2 (Mar. 11, 2008)

    Third Circuit upholds Treasury Regulation providing that a foreign corporation, to be eligible to claim tax deductions in connection with real property activities in the United States, must file its tax return within 18 months of the filing deadline set forth in Internal Revenue Code Section 6072

    • In a recent decision, the Third Circuit Court of Appeals held that for a non-US corporation to claim tax deductions in connection with its US real property activities, it must file its tax return within 18 months of the year in which income was earned.
    • In so holding, the Circuit Court upheld the validity of Treasury Regulation 1.882-4(a)(3)(i).
    • Court analyzed the IRS regulation under Chevron, and found that it was within the scope of Congress’s delegation of rulemaking authority to the IRS.
    • Case suggests that Courts will give heightened deference to IRS rulemaking, because tax is “complex and highly technical.”
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