Jun. 8, 2012

Are Alternative Investment Strategies Within the Spirit of UCITS?

In the last four years in particular, Undertakings for Collective Investment in Transferable Securities (UCITS) have been increasingly utilised by fund sponsors pursuing alternative investment strategies.  This can be attributed to a desire on the part of those fund sponsors to source new lines of capital at a time that many investors were seeking shelter in regulated structures with built-in investor protection measures.  Whether those factors are here for the long term may not be clear, but with approximately €123 billion estimated to be invested in alternative investment UCITS, it is fair to say that a market for these funds has successfully been forged.  However, there is a small yet growing wave of sentiment in favour of narrowing the investment scope of UCITS.  But is this really the time to consider tightening the reins on UCITS?  In a guest article, Maples and Calder Partner Stephen Carty provides background on the UCITS regime and explores this pressing question.  See also “The Implications of UCITS IV Requirements for Asset Management Functions,” Hedge Fund Law Report, Vol. 4, No. 36 (Oct. 13, 2011).

RCA Symposium Focuses on Hedge Fund Governance, Form PF, Enterprise Risk Management, Regulatory Enforcement, Criminal Prosecution, CCO and GC Liability and Third Party Relationships (Part Two of Two)

On April 16, 2012, the Regulatory Compliance Association held its Regulation and Risk Thought Leadership Symposium (RCA Symposium) in New York City at the Pierre Hotel.  The RCA Symposium brought together leading practitioners and regulators in a series of panel discussions, each of which offered unique insight on various topics of relevance for hedge fund managers.  This is the second article in a two-part series summarizing the highlights from the RCA Symposium.  This second article discusses the sessions covering: the new paradigm of regulatory enforcement and white-collar prosecution; chief compliance officer and general counsel liability; and re-evaluation of the operating model for third party relationships.  The first article discussed the sessions covering: fund governance issues; interpreting, preparing for and completing Form PF; and enterprise risk management for hedge fund managers.  See “RCA Symposium Focuses on Hedge Fund Governance, Form PF, Enterprise Risk Management, Regulatory Enforcement, Criminal Prosecution, CCO and GC Liability and Third Party Relationships (Part One of Two),” Hedge Fund Law Report, Vol. 5, No. 22 (May 31, 2012).

Recent Cayman Islands Developments Impacting Fund Governance, Master Fund Registration and the Insolvency Regime: An Interview with Neal Lomax, Simon Dickson and Simon Thomas of Mourant Ozannes

Cayman Islands legislators and courts have been increasingly active in enacting reforms and deciding cases with relevance to hedge fund managers and fund investors.  The Hedge Fund Law Report recently interviewed Neal Lomax, Simon Dickson and Simon Thomas of Mourant Ozannes’ Cayman office to get their perspective on this recent activity.  Specifically, our interview covered developments and market practice with respect to: fund governance in the aftermath of the Cayman Grant Court’s decision in Weavering; recent legislative developments, including the new registration regime for Cayman-domiciled master funds; and recent judicial decisions that reshape the Cayman fund insolvency regime.  This article contains the full text of our interview.

Cayman Court of Appeal Holds that Soft Wind-Down of One or More Segregated Portfolios of a Segregated Portfolio Company Does Not In and Of Itself Justify a Judicial Winding-Up of the Entire Company

In the wake of the 2008 financial crisis, some troubled hedge funds organized under the laws of the British Virgin Islands (BVI) and the Cayman Islands elected to suspend redemption rights and undertook “soft wind-downs” of their operations.  See Cayman Hedge Funds, Soft Wind-Downs and Disclosure,” Hedge Fund Law Report, Vol. 4, No. 7 (Feb. 25, 2011).  In response, fund investors sought to gain leverage by petitioning to force the funds into involuntary liquidation on the ground that the funds were no longer capable of carrying out their stated business purposes.  BVI and Cayman courts have taken conflicting views on whether a soft wind-down is a valid ground for an involuntary winding-up petition.  The Cayman Island Court of Appeal recently addressed a novel question involving whether the winding down of the various segregated portfolios comprising a “segregated portfolio company” (SPC) would warrant winding down of the entire SPC.

SEC Sanctions Quantek Asset Management and its Portfolio Manager for Misleading Investors About “Skin in the Game” and Related-Party Transactions

Investments by hedge fund managers in their own funds and related party transactions (such as loans from a fund to a manager) exist at opposite sides of the incentive spectrum.  The former – so-called “skin in the game” – is typically thought to align the interests of investors and managers while the latter is seen as pitting the interests of investors and managers in direct conflict.  Investors want to know about both, for obviously different reasons.  A May 29, 2012 SEC Order Instituting Administrative and Cease-And-Desist Proceedings against Quantek Asset Management LLC (Quantek), Javier Guerra, Bulltick Capital Markets Holdings, LP (Bulltick) and Ralph Patino highlights these and other investor considerations.  This article summarizes the SEC’s factual and legal allegations against Quantek, Bulltick, Guerra and Patino, and the settlement among the parties.  The SEC’s action follows private actions against the same or similar parties.  See, e.g., “Fund of Hedge Funds Aris Multi-Strategy Fund Wins Arbitration Award against Underlying Manager Based on Allegations of Self-Dealing,” Hedge Fund Law Report, Vol. 4, No. 39 (Nov. 3, 2011); “British Virgin Islands High Court of Justice Rules that Minority Shareholder in Feeder Hedge Fund that had Permanently Suspended Redemptions Was Not Entitled to Appointment of a Liquidator,” Hedge Fund Law Report, Vol. 4, No. 9 (Mar. 11, 2011).

Ernst & Young Survey Shows Risk Managers Possess Tremendous Influence and Face Substantial Challenges in the Asset Management Industry

Hedge fund investors and regulators are intensely focused on fund managers’ risk management functions.  Investors conduct extensive due diligence to ascertain how managers are addressing various investment, operational and compliance risks confronting the managers’ businesses.  Regulators are mandating that fund managers provide voluminous information about the risks their funds face through disclosures such as Form PF.  See “Form PF: Operational Challenges and Strategic, Regulatory and Investor-Related Implications for Hedge Fund Managers,” Hedge Fund Law Report, Vol. 5, No. 4 (Jan. 26, 2012).  As such, a firm grasp of risk management is imperative for hedge fund managers seeking institutional investment and credibility with regulators.  In that vein, in May 2012, Ernst & Young released its 2012 survey report entitled, “A growing sphere of influence – survey of U.S. asset management risk managers” (Report).  The Report provides market color with relevance to hedge fund managers on how the broader asset management industry is approaching risk management.  The Report describes risk managers’ views on their level of influence within their firms; their mandates; their biggest challenges; the top risks they face; their risk monitoring responsibilities; the frequency of risk reporting they provide; future risk management initiatives; their awareness of budgets; use of key risk metrics; and hybrid risk management organizations.  This article summarizes key findings contained in the Report.  See also “What Is a Chief Risk Officer, and Should Hedge Fund Managers Have One?,” Hedge Fund Law Report, Vol. 2, No. 31 (Aug. 5, 2009).

Robert B. Kaplan, Co-Chief of the Asset Management Unit of the SEC Division of Enforcement, Joins Debevoise

On May 31, 2012, Debevoise & Plimpton LLP announced that Robert B. Kaplan, Co-Chief of the Asset Management Unit of the U.S. Securities and Exchange Commission’s Division of Enforcement, will join the firm as a litigation partner resident in the firm’s Washington, D.C. office.  For analysis by Debevoise attorneys published in the HFLR, see “SEC Risk Alert Discusses When Social Media Interactions May Constitute Prohibited Hedge Fund Client Testimonials,” Hedge Fund Law Report, Vol. 5, No. 14 (Apr. 5, 2012).

Two New Deputies to Help Lead SEC’s Hedge Fund Enforcement Unit

The U.S. Securities and Exchange Commission’s asset management unit has named Julie Riewe and Marshall Sprung as new deputies to help manage investigations into hedge fund and private equity fund manager misconduct, according to Bloomberg.

Private Equity Partner Jonathan Melmed Joins Morrison & Foerster’s M&A Practice in New York

On May 29, 2012, Morrison & Foerster announced that Jonathan M.A. Melmed has joined the firm’s New York office as the head of the New York private equity practice.