Jul. 18, 2019

Why Managed Accounts Present Conflicts of Interests for Hedge Fund Managers (Part One of Three)

In the wake of the 2008 global financial crisis, some institutional investors began to seek ways to minimize the risks to which they had acutely become exposed, including the inability to redeem their investments for cash within the expected timeframe, as well as the co‑investor adjacency risk from investing in a commingled fund. Simultaneously, the negotiating power of allocators against fund managers increased. These events led to an increase in institutional investors’ use of customized products to access hedge fund-type investment strategies, mainly in the form of managed accounts and single investor funds. This three-part series examines why the management of both a commingled fund and a managed account with the same – or similar – investment strategy presents conflicts of interest for a fund manager. This first article explores the increased use of separately managed accounts by institutional investors; ways that separately managed accounts differ from single investor funds – commonly referred to as “funds of one”; and the general conflicts of interest that can arise for an investment manager when managing multiple client accounts. The second and third articles will discuss in detail the primary conflicts of interest – including those arising from differences in transparency and liquidity rights between a managed account client and an investor in a commingled fund, as well as conflicts relating to trade and expense allocations – and suggest several best practices for managing those conflicts. For more on conflicts of interest, see our three-part series on the simultaneous management of hedge funds and private equity funds: “Investment Conflicts” (May 7, 2015); “Operational Conflicts” (May 14, 2015); and “How to Mitigate Conflicts” (May 21, 2015).

How Fund Managers Can Use Technology to Transform and Streamline Complex Legal Operations: One Manager’s Example

In recent years, many large corporate law departments have realized that mastering their operational aspects is fundamental to their overall success. Several of the same strategic goals that drive large corporate law departments to focus on legal operations also apply to hedge fund law departments, and many of the processes and tools deployed on the corporate side are translatable as well. Like their corporate brethren, hedge fund general counsels are continually being asked to do more with less – which often means looking for ways to reduce expenses; implement efficiencies; and use data analytics and technology to empower their internal resources to focus on value-enhancing legal advising. In a guest article, Brian Meyer, partner, co-chief operating officer and general counsel of Fir Tree Partners, explains how his firm has taken an ambitious – but thoughtfully scaled – approach to managing its own complex legal operations through selective application of many of the same processes and technological solutions used by large corporate law departments. For more on ways fund managers are using technology to streamline operations, see “FINRA RegTech Conference Reviews AI, RegTech Adoption and Compliance Challenges (Part Two of Two)” (May 30, 2019); and “Forbes Insights and K&L Gates Examine How Financial Executives and GCs Are Responding to Technological Disruption” (May 9, 2019).

How Fund Managers Can Establish Effective Incident Response Plans

Incident response plans are a necessary weapon in a fund manager’s arsenal to combat cybercrime. The plan should be developed and maintained by a cross-functional group, with input from experienced outside counsel. Managers should ensure that the plans are tailored and dynamic enough to respond to the uncertainty of threats. To help readers establish effective incident response plans, the Hedge Fund Law Report recently interviewed Luke Dembosky, co‑chair of Debevoise & Plimpton’s cybersecurity and data privacy practice and a former long-time cyber crimes prosecutor for the DOJ. This article presents his insights. See our three-part series on how fund managers should structure their cybersecurity programs: “Background and Best Practices” (Mar. 22, 2018); “CISO Hiring, Governance Structures and the Role of the CCO” (Apr. 5, 2018); and “Stakeholder Communication, Outsourcing, Co-Sourcing and Managing Third Parties” (Apr. 12, 2018). To further explore how fund managers can prepare themselves for cyber incidents, on Tuesday, July 30, 2019, at 1:00 p.m. ET, the Hedge Fund Law Report and its sister product the Cybersecurity Law Report will host a complimentary webinar entitled “Conducting an Effective Tabletop Exercise.” The program will be moderated by Shaw Horton, Associate Editor of the Hedge Fund Law Report, and will feature Dembosky, John “Four” Flynn, chief information security officer at Uber, and Jill Abitbol, Senior Editor of the Cybersecurity Law Report. To register for the webinar, click here.

Luxembourg Vehicles Can Assist Managers With Marketing Private Funds in the E.U. (Part One of Two)

Despite geopolitical uncertainty, Luxembourg remains a stable center from which U.S. fund managers can reach Europe. Nevertheless, U.S. managers must make difficult decisions when satisfying substance requirements and deciding how to market into the E.U. The Association of the Luxembourg Fund Industry (ALFI) recently held a seminar that looked at these issues, among others. The program featured panel discussions with representatives from financial services, asset management, legal and accounting firms. This article, the first in a two-part series, explores the structuring and marketing of private funds, as well as the establishment of fund management companies, in the E.U. The second article will analyze the impact of Brexit on cross-border investment management, available means of fund distribution and sustainable investments. For more from ALFI, see “How Fund Managers Can Navigate Establishing Parallel and Debt Funds in Luxembourg in the Shadow of Brexit and Proposed E.U. Delegation Rules” (Jun. 14, 2018).

Brexit Remains an Immediate FCA Concern for 2019/2020, With Regulatory Evolution a Longer-Term Area of Interest

The U.K. Financial Conduct Authority (FCA) recently released its 2019‑2020 Business Plan. FCA Chief Executive Andrew Bailey has noted that, while dealing with Brexit is the most immediate challenge faced by the FCA, the regulator is also aiming to adapt to the ever-changing financial sector and prioritize the future of regulation. In addition to Brexit, the plan focuses on seven “cross-sector priorities” that will affect some or all of the seven distinct business sectors within its purview, including investment management. This article summarizes the FCA’s immediate and cross-sector priorities, as well as the other portions of the plan most relevant to private fund managers. For coverage of prior FCA business plans, sector views and mission statements, see “Preparing for Brexit a Key FCA Priority for 2018/2019” (May 31, 2018); “FCA Details Three of Its 2017 Priorities: Competition in the Asset Management Market, Liquidity Management and Custodians” (May 4, 2017); and “FCA 2016‑2017 Regulatory and Supervisory Priorities Include Focus on AML, Cybersecurity and Governance” (Apr. 14, 2016).

Troutman Sanders Adds Genna Garver to Its New York Office

Genna Garver has joined the corporate practice of Troutman Sanders as a partner in New York. Garver provides targeted, practical advice to investment advisers, family offices, hedge funds and private equity funds in connection with federal and state securities laws; private fund formation; and securities offerings. For additional commentary from Garver, see “Connecticut Welcomes You! Federal Financial Regulatory Reform Restores Connecticut’s Authority Over Hedge Fund Advisers” (Jul. 30, 2010); and “Implications of the Volcker Rule – Managing Hedge Fund Affiliations With Banks” (Mar. 11, 2010).