Aug. 23, 2018

An Introduction to Quantitative Investing: Regulatory Action, Guidance and Risk (Part Two of Three)

Global regulators seldom prescribe rules for, or offer guidance on, quantitative trading generally. Nevertheless, fund managers employing quantitative strategies can glean lessons from the literature that does exist – such as SEC guidance on robo-advisers – even if it may not strictly apply. This article, the second in a three-part series, analyzes regulatory actions and guidance applicable to quantitative managers, as well as the special regulatory risks that those managers may face. The first article provided an overview of quantitative investing and the ways it differs from fundamental investing; discussed the growth of quantitative investing; and evaluated the practical risks and misconceptions of quantitative investing. The third article will explore the heightened importance of cybersecurity and intellectual property protection for quantitative managers; negotiations with investors over capacity constraints; and methods for quantitative managers to attract and retain talent in the face of stiff competition. See “Will Inadequate Policies and Procedures Be the Next Major Focus for SEC Enforcement Actions?” (Nov. 30, 2017).

Credit Fund Specialist Discusses Trends in Fund Formation and the Credit Fund Space

Aubry Smith recently joined Mayer Brown in its New York office as a partner in the corporate and securities practice, where he focuses on private fund formation, with an emphasis on credit funds. He also advises on the establishment and operation of private investment funds and managed accounts; investment transactions, including co-investments, joint ventures, seed capital arrangements and secondary market sales of fund interests; and the establishment and acquisition of investment advisory businesses and management teams. In connection with his move to Mayer Brown, Hedge Fund Law Report recently interviewed Smith about trends in fund formation and credit funds in particular. This article summarizes his thoughts on environmental, social and governance – along with mission-driven or impact – funds and the challenges they raise; competition in the credit fund space; ways credit funds can distinguish themselves; the types of managers that are starting credit funds; and the opportunities for credit funds in Europe versus the U.S. For additional commentary from Mayer Brown partners, see “SEC Cyber Unit Files Charges Against Allegedly Fraudulent ICO” (Jan. 11, 2018); 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).

As AUM Continues to Grow, Australian Pension Funds Are Primed to Invest With U.S. Private Fund Managers

For more than 25 years, Australia’s compulsory superannuation system has expanded its assets under management. Currently managing assets valued at A$2.6 trillion, the superannuation funds (known as “super funds” or “supers”) are twice the size of Australia’s gross domestic product and comprise the world’s fourth-largest pension fund system behind those of the U.S., U.K. and Japan. There is little doubt that the private funds industry will feel the effects of the continued growth in Australian super funds over the next decade. Given this growth and the super funds’ clear interest in investment opportunities outside of Australia, all fund managers should familiarize themselves with the supers. In a guest article, Paul Downs, partner at Hogan Lovells, provides background on Australian superannuation fund growth, structure, organization and investment activity, as well as discusses key considerations and requirements of which fund managers should be aware when negotiating with these investors. See “Practical Guidance for Hedge Fund Managers on Raising Capital in Australia, the Middle East and Asia” (Oct. 30, 2014). For additional insight from Hogan Lovells, see “ECHR Decision Imposes New Criteria for Email Monitoring Practices on Fund Managers With European Operations” (Sep. 28, 2017).

SEC Continues to Scrutinize Accelerated Private Equity Monitoring Fees

Commencing in 2013, the SEC turned its attention to the fee and expense practices of private equity firms. See “SEC Asset Management Unit Chief Bruce Karpati Addresses Private Equity Enforcement Trends, Initiatives and Priorities” (Feb. 7, 2013). One area of concern involved managers’ disclosures regarding their receipt of monitoring fees from portfolio companies and the acceleration of those fees upon certain triggering events. On that front, the SEC recently entered into a settlement with two investment advisers that were allegedly negligent in failing to make proper disclosures to investors regarding their receipt of accelerated monitoring fees, resulting in the payment of substantial reimbursements to affected investors and civil penalties. This article analyzes the SEC settlement order. For discussion of a recent settlement involving undisclosed compensation from third-party service providers, see “SEC Continues Scrutiny of Undisclosed Fees at Fund Managers” (Jun. 7, 2018). For additional coverage of SEC scrutiny in this area, see “SEC Enforcement Director Highlights Increased Focus on Undisclosed Private Equity Fees and Expenses” (May 19, 2016). See also our three-part series on fee and expense allocation practices: “Practices Fund Managers Should Avoid” (Aug. 25, 2016); “Flawed Disclosures to Avoid” (Sep. 8, 2016); and “Preventing and Remedying Improper Allocations” (Sep. 15, 2016).

Gibson Dunn Attorneys Analyze Lynn Tilton Trial: Principal Charges (Part Two of Two)

At the recent Alternative Asset Management General Counsel Luncheon presented by international recruiting firm Major, Lindsey & Africa (MLA) and hosted by MLA partners Brian T. Davis and Dimitri G. Mastrocola, Gibson Dunn partner Reed Brodsky and of counsel Mary Beth Maloney offered their thoughts on the trial of Patriarch Partners and Lynn Tilton, who had been charged with fraudulently managing certain collateralized loan obligations. This article, the second in a two-part series, evaluates the SEC’s three principal charges against Tilton. The first article summarized Brodsky’s and Maloney’s views on the fairness of SEC administrative proceedings, the key takeaways from the trial and the primary defense themes, including due process and equal protection claims about administrative law judge proceedings generally. For additional commentary from Gibson Dunn attorneys, see “Implications for Fund Managers of the Supreme Court’s Ruling in Kokesh v. SEC” (Jun. 15, 2017); and “Is This an Inspection or an Investigation? The Blurring Line Between Examinations of and Enforcement Actions Against Private Fund Managers” (Mar. 29, 2012). For coverage of prior programs hosted by MLA, see “Client Consent and Other Issues Requiring Careful Consideration by Fund Managers Involved in M&A Transactions” (May 18, 2017); and “Former Prosecutors Address Trends in Cybersecurity for Alternative Asset Managers, Diligence When Acquiring a Company and Breach Response Considerations” (Oct. 6, 2016).

FCA Pledges to Be More Innovative, Transparent and Forward Looking Following Practitioner Survey

The U.K. Financial Conduct Authority (FCA) recently released the results of its 2018 Practitioner Panel Survey. As it has for each of the past several years, the FCA looked at seven broad areas: its performance as a regulator; international issues; trust in the FCA; contact and communication with the FCA; understanding of regulation and regulatory burden; enforcement; and consumer credit firms. Although most respondents believe that the FCA is meeting its key regulatory objectives, the FCA also found three key areas for improvement: facilitating innovation in the U.K. financial services industry, making regulation more transparent and making regulation “more forward looking.” This article analyzes the portions of the survey report most relevant to private fund managers. For additional commentary from the FCA, see “FCA Chief Executive Offers Perspectives on the Importance of Asset Management” (May 17, 2018).

Finn Dixon & Herling Hires Former U.S. Attorney for Connecticut

Deirdre M. Daly, who served four years as the U.S. Attorney for the District of Connecticut, has joined Finn Dixon & Herling as a partner in the litigation and government and the internal investigations practice groups. Joining Andrew Calamari, another new partner who was Regional Director of the SEC’s New York office and who worked with her when she was U.S. Attorney, Daly will practice white collar criminal defense work and aims to build a practice of monitoring and internal investigations. For commentary from other Finn Dixon attorneys, see “RCA Panel Highlights Conflicts of Interest Affecting Fund Managers” (Jul. 2, 2015); and “The Transformation of Third-Party Hedge Fund Marketer Contracts and Compensation” (May 3, 2012).