Nov. 26, 2008

House Hearings on Hedge Funds’ Role in the Financial Crisis

The heads of five of the most successful U.S. hedge funds testified on November 13 before the House Committee on Oversight and Government Reform.  In the course of the hearings, Committee members evidenced concern about systemic risk posed by hedge funds, and expressed interest in greater government oversight of hedge fund operations, investments and taxation.  The hearing offered a foreshadowing of heightened government scrutiny that hedge funds are likely to face when the 111th Congress convenes in January under substantially increased Democratic majorities in both houses.

Responses to Challenges Facing Credit Opportunities Hedge Funds: How to Stay Above Water in Tough Times

A significant number of credit opportunities hedge funds, which typically invest primarily in leveraged loans and other credit, were launched in the past year or so, hoping to take advantage of market volatility and decreased liquidity.  However, these funds are running into trouble as expectations have failed to keep pace with economic reality.  Banks have tightened credit and collateral standards for hedge funds that invest in risky assets, and fund investors have been redeeming fund investments in record amounts.  This article details specific strategies that funds have used to stay above water when faced with the prospect of violating covenants in their loan documents – lessons that can be applied to hedge funds facing challenges across various investment strategies.

ISDA Master Agreement and Credit Support Annex at Heart of Hedge Fund Collateral Dispute

BDC Finance LLC has filed a lawsuit against Barclays Bank Plc, its counterparty in a derivatives facility that involved both total return swap and credit default swap index transactions.  The suit – like the recent Lehman Brothers bankruptcy and SIPA filings – highlights the importance of close attention to the terms of ISDAs and related swap documentation, especially the identity of the valuation agent in various circumstances and the parties’ obligations with respect to posting and return of collateral.

Germany’s Co-Governing Party Proposes Sweeping Regulations for Hedge Funds

On October 27, Germany’s Social Democratic Party (SPD), junior partner in Chancellor Angela Merkel’s government, proposed 14 regulatory measures aimed at generating a “culture of accountability for the financial markets” and establishing “a new balance between the market and the state.”  The regulatory measures call for “tightly regulating hedge funds.”  We describe precisely how the measures would work, and the likelihood that they will become policy.

FinCEN Withdraws AML Rule Proposals for Alternative Investment Entities

The U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) announced on October 30 that it had withdrawn three rule proposals it put forward in September 2002 and May 2003.  We examine the background of the withdrawn rules, the reasons why they were withdrawn and the likelihood that they will resurface, in substance – and how all of this may affect hedge funds.

SEC Brings Charges Against Hedge Fund Manager for “Portfolio Pumping”

On October 16, 2008, the SEC instituted an order against the investment advisory firm MedCap Management & Research, LLC and its principal for allegedly engaging in a practice known as “portfolio pumping.”  We explain what that is, why the SEC took issue with it and what it means for hedge fund trading.