Oct. 10, 2008

New Tax Law Restricts Hedge Fund Fee Deferral Arrangements

The $700 billion “bailout bill” signed into law on October 3, 2008 contains changes to the U.S. tax code that will effectively eliminate the ability of U.S. hedge fund managers to defer paying tax on fee income from their offshore hedge funds.  The new law, enacted as part of the same bill that contained the Emergency Economic Stabilization Act of 2008, will impose U.S. tax on a current basis on deferred compensation from offshore entities that are not subject to U.S. tax or to a comprehensive non-U.S. income tax, with the principal target being U.S. managers of offshore hedge funds.  In a guest article, Kirkland & Ellis partner Andrew Wright provides a lucid analysis of the relevant provisions of the new law.

How Can Hedge Funds Structure Their Prime Brokerage Arrangements to Protect Themselves?

With the recent upheaval in the credit markets generally and in the prime brokerage industry specifically, it has become increasingly important for hedge funds to structure their prime brokerage arrangements to include protections against a potential liquidation of the prime broker or bankruptcy of the prime broker’s holding company.  Key considerations include: the use of multiple prime brokers, collateral policies, rehypothecation rights, margin requirements, margin lock-ups and margin lock-up termination events.  As evidenced by recent prime broker failures or near-failures, the structure of prime brokerage arrangements can have a profound impact on a fund’s access to its own cash and securities at precisely the time when it needs them most.

High Water Marks Take Center Stage in a Year of Weak Hedge Fund Performance

In what increasingly looks like the worst year for the hedge fund industry in nearly two decades, some investors are wondering if this could be a good time to bargain for better investment terms. Faced with a wave of redemption requests, funds have taken various approaches to retaining investors. One increasingly common approach is reducing fees in exchange for a longer lock-up. Another approach, slightly less common, involves requests from new investors (or from current investors contemplating new investments) to come in under the terms of an old high water mark. Such arrangements can delay, sometimes substantially, the date on which a hedge fund manager laboring under a high water mark will next earn its performance fee.

SEC Charges Hedge Fund Adviser With “Cherry Picking”

On September 9, 2008, the Securities and Exchange Commission filed a civil complaint in the United States District Court for the Southern District of New York charging James C. Dawson, an individual investment adviser, with securities fraud and investment adviser fraud.  The SEC’s complaint alleges that Dawson, the investment adviser and sole general partner of an unregistered hedge fund, carried out a scheme in which he “cherry-picked” profitable trades for his own account, thereby harming his clients and unjustly enriching himself at their expense.

“The First Billion Is the Hardest: Reflections on a Life of Comebacks and America’s Energy Future,” By T. Boone Pickens; Crown Business, 272 pages

T. Boone Pickens is one of the great characters of American business.  At least he ought to be, given that matchlessly resonant name, so perfectly suited to his central-casting persona as the quintessential, plain-speaking independent Texas oilman.  But if his name harkens back to frontier times in the Wild West – and he first rose to prominence as founder of Mesa Petroleum way back in the 1960s, then won notoriety as a corporate raider (or, as he prefers, pioneering shareholder activist) in the 1980s – it’s also true that Pickens has made a late-life comeback in the 21st century.