As discussed in previous issues of the Hedge Fund Law Report, hedge funds have discovered in life settlements the potential for absolute, uncorrelated returns – a particularly attractive investment proposition on the heels of an era in which assets heretofore considered uncorrelated actually rose and fell (mostly fell) as a group.  Specifically, in our October 1 issue, we provided a detailed overview of the primary legal and business considerations applicable to hedge funds when investing in life settlements.  See “Hedge Funds Turning to Life Settlements for Absolute, Uncorrelated Returns,” Hedge Fund Law Report, Vol. 2, No. 39 (Oct. 1, 2009).  Then in our October 7 issue, we focused on the most salient tax considerations for hedge funds investing in life settlements, including discussions of income versus capital gain considerations, offshore versus onshore issues, implications of treaties for structuring and related issues.  See “Key Tax Considerations for Hedge Funds When Investing in Life Settlements,” Hedge Fund Law Report, Vol. 2, No. 40 (Oct. 7, 2009).  This article – the third in the three-part series – focuses on the ability of hedge funds to invest in life settlements via securitizations, rather than directly.  The goal of the article is to help hedge fund managers that seek to access the life settlements market determine the most efficient way to do so.  To effectuate that goal, this article discusses: the mechanics of life settlements and life settlement securitizations; ways in which the risk profile of life settlement securitizations differs from the risk profile of other, more typical types of securitizations, such as those involving mortgages; real world examples of life settlement securitizations; reasons why life settlement securitizations are relatively infrequent; testimony at securitization hearings held on September 24, 2009 before the Capital Markets Subcommittee of the House Financial Services Committee; the financial, operational and regulatory benefits of life settlement securitizations; the various downsides of life settlement securitizations; salient points raised during the recent “Life Settlements and Longevity Summit” sponsored by the International Quality and Productivity Center; anticipated regulatory developments at the federal and state levels; and life settlement swaps. Read full article …

For institutional investors in hedge funds, the most objectionable aspect of the recent crisis – even worse than the poor performance – was the evaporation of liquidity, the inability to get one’s money back upon request.  See, e.g., “How Can Hedge Fund of Funds Managers Manage a ‘Liquidity Mismatch’ Between Their Funds and Underlying Hedge Funds?,” Hedge Fund Law Report, Vol. 2, No. 40 (Oct. 7, 2009); “Investors Demand More Specificity in Hedge Fund Governing Documents Regarding Circumstances in which Liquidity Management Tools may be Used,” Hedge Fund Law Report, Vol. 2, No. 30 (Jul. 29, 2009).  In the still-difficult fundraising environment following the crisis, hedge fund managers have been offering variations on the traditional hedge fund structure, all in the interest of accommodating investors’ liquidity concerns and thereby growing or replenishing assets under management.  See “Structuring Managed Accounts Key Focus of GlobeOp’s ‘Managed Accounts Insights for Investors’ Event,” Hedge Fund Law Report, Vol. 2, No. 39 (Oct. 1, 2009); “Steel Partners’ Restructuring and Redemption Plan: Precedent or Anomaly?,” Hedge Fund Law Report, Vol. 2, No. 34 (Aug. 27, 2009); “How Are Hedge Fund Managers with Funds Under their High Water Marks Renegotiating Performance Fees or Allocations?,” Hedge Fund Law Report, Vol. 2, No. 33 (Aug. 19, 2009); “What Happens to High Water Marks When Managers Restructure Hedge Funds?,” Hedge Fund Law Report, Vol. 2, No. 43 (Oct. 29, 2009).  One provocative alternative being explored by certain managers would involve importing the traditional “capital on call” funding approach of the private equity world into the hedge fund structure.  According to sources polled by the Hedge Fund Law Report, this approach remains unprecedented.  Nonetheless, in light of the heightened concern with liquidity on the part of hedge fund investors, any technique to enhance liquidity merits a serious look.  Therefore, this article details the different funding mechanisms historically used by private equity and hedge funds, then explores the benefits and burdens to hedge funds of using a capital on call mechanism. Read full article …

In a draft paper dated October 16, 2009 and titled “Trust and Delegation,” four scholars analyzed the frequency of misrepresentations and inconsistencies on the part of hedge fund managers in the course of due diligence performed by institutional investors.  They did this by analyzing hundreds of due diligence (DD) reports prepared by a DD firm.  Most notably, they found that 21 percent of the hedge fund managers described in the reports they sampled misrepresented their past legal and regulatory history; 28 percent made incorrect or unverifiable representations about other topics; and 42 percent had had “verification problems” including either misrepresentations or inconsistencies.  This article describes in detail the more salient findings of the study and, more importantly, explores how hedge fund investors and managers can put those findings into practice.  For investors, this entails reviewing current approaches to DD to refocus on the most common categories of verification problems.  For managers, this involves focusing on knowledge management in order to avoid accidental or negligent misrepresentations, and recognizing the heightened importance of transparency and specificity in responding to DD inquiries. Read full article …

The notable indictment, arrest and prosecution of Matthew Tannin and Ralph Cioffi, two hedge fund managers for the now-defunct Bear Stearns Asset Management (BSAM) has, at least for Tannin, taken a momentarily beneficial turn.  Accused of conspiracy, securities fraud and wire fraud, and with trial looming, Tannin moved to suppress a purportedly damaging e-mail the Federal Bureau of Investigation (FBI) had recovered from his personal e-mail account with a search warrant.  The Honorable Frederic Block, who presides over the case in the United States District Court for the Eastern District of New York, agreed with Tannin that the search warrant was deficient, the resulting search unconstitutional and that the United States Attorney’s Office could not cure the error.  As a result, on October 26, 2009, the court ordered the e-mail suppressed on the eve of trial.  We describe the background of the action and the court’s legal analysis with respect to Tannin’s motion to suppress. Read full article …

Matador Investments Ltd. (Matador or the Fund) is a fund of funds organized under the laws of the Cayman Islands.  Following a request by investors for redemption of their interests in Matador, the Fund first imposed a “gate” on redemptions (to stretch out redemption payments over time), and later imposed a complete freeze on redemptions.  The investors brought an action against the Fund seeking a judicial liquidation of the Fund on the ground that, following their redemption requests, they had become unpaid “creditors” of the Fund.  See “How Will the New Cayman Islands Insolvency Regime Affect the Winding-Up of Cayman Islands Hedge Funds?,” Hedge Fund Law Report, Vol. 2, No. 42 (Oct. 21, 2009).  Matador, relying on the recent Strategic Turnaround decision, argued that until the redemptions were paid in full, the investors were still bound by the Fund’s governing documents, which permitted both gates and freezes on redemptions.  The court disagreed, appointed a liquidator, and directed the Fund to commence winding up its affairs.  We explain the parties’ arguments and how the court distinguished the Matador investors from those in the Strategic Turnaround case. Read full article …

Dark pools, flash orders and high frequency trading have received significant regulatory attention of late.  On October 21, 2009, the SEC proposed rule changes regarding dark pools.  Dark pools are electronic networks that facilitate trading of shares outside of traditional exchanges and give certain investors the ability to trade large blocks of shares without notifying the entire market of the transaction.  The proposed rules would require a greater proportion of stock quotes to be displayed and would restrict communication between dark pools.  The overall goal of the proposed rule changes is to push more orders onto publicly displayed markets.  The SEC also has recently proposed a ban on flash orders, a practice in which certain investors are privy to a quote for a short time before others can view that quote.  See “What Are Flash Orders, and How Might Regulation Curtail the Ability of Hedge Funds Employing High-Frequency Trading Strategies to Profit from Such Orders?,” Hedge Fund Law Report, Vol. 2, No. 32 (Aug. 12, 2009).  Finally, high frequency trading has been receiving significant attention of late, both from regulators and the press, broadly focusing on the question of whether the practice unfairly privileges traders with access to co-located computers on or near exchanges.  See “Does Europe Offer a More Hospitable Regulatory Environment for High Frequency Trading Than the United States?,” Hedge Fund Law Report, Vol. 2, No. 39 (Oct. 1, 2009).  The recent regulatory attention on these topics was the backdrop for a hearing on October 28, 2009 hosted by the U.S. Senate Subcommittee on Securities, Insurance and Investment.  At the hearing, the Subcommittee heard testimony from regulators, industry participants and a fellow senator on, broadly, whether the current regulatory structure is up to the task of regulating the innovative, fast-evolving topics of dark pools, flash orders and high frequency trading.  The Hedge Fund Law Report attended the hearing, and this article summarizes the points discussed at the hearing of most pressing relevance for hedge funds.  Specifically, we offer significant detail on what was said, and what the tone and substance of the hearings may mean for regulatory developments in the near term with respect to dark pools, flash orders, high frequency trading and market surveillance. Read full article …

On November 3, 2009, the Securities and Exchange Commission announced the selection of Norm Champ as Associate Regional Director for Examinations in the agency’s New York Regional Office. Read full article …

On November 2, 2009, Winston & Strawn LLP announced that it had expanded its private equity practice and middle-market capabilities with the addition of Dominick P. DeChiara, Bradley C. Vaiana, Bryan C. Goldstein and Jennifer C. Kurtis, who have joined the firm’s New York office as partners.  The attorneys came to Winston from Nixon Peabody, where DeChiara chaired the private equity practice. Read full article …

On November 3, 2009, alternative investment firm Altegris announced that that it had appointed Ken McGuire as Chief Operating Officer. Read full article …