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    Nov. 15, 2012

Understanding the Benefits and Uses of Series LLCs for Hedge Fund Managers

Hedge fund managers are continually striving to maximize the advantages available through their choice of legal entity for structuring their funds and management companies.  The series limited liability company (Series LLC) offers a relatively new variation on the traditional limited liability company structure that provides not only liability protection for members vis-à-vis non-members, but also liability protection for members of a given series of interests within the Series LLC vis-à-vis members of other series of interests within the same Series LLC.  In a guest article, Yehuda M. Braunstein, a Partner at Sadis & Goldberg LLP, and Todd K. Warren, Of Counsel at Sadis & Goldberg LLP, discuss: the history and evolution of the Series LLC; the various structural requirements and issues to be considered; the advantages and challenges that are presented by the Series LLC; practical tips regarding how to utilize the Series LLC; and potential uses of the structure by hedge fund managers.

Lessons Learned by Hedge Fund Managers from the August 2012 Initial Form PF Filing

Form PF has presented, and continues to present, daunting challenges for hedge fund managers required to file the form.  Very large hedge fund advisers – those with $5 billion in regulatory assets under management – were required to file their initial Forms PF by August 29, 2012.  The initial filing highlighted some best practices as well as some pitfalls associated with the Form PF process.  On October 11, 2012, at the Princeton Club in Manhattan, Global Risk Management Advisors, Inc., Citi Prime Finance, Imagine Software, Sidley Austin LLP and the Hedge Fund Law Report hosted a seminar entitled, “Lessons Learned and Not Learned From the August 2012 Initial Form PF Filing.”  The seminar participants all had direct experience with the initial round of Form PF filings, and the seminar offered an occasion to reflect on that experience and extract lessons from it.  In particular, participants at the seminar discussed specific lessons learned from the initial filing process; some common mistakes made by first filers; how to craft assumptions used in Form PF; the treatment of derivative positions in Form PF; how regulators will use the information in Form PF in connection with enforcement actions against hedge fund managers; how to handle investor requests for Form PF or the data in it; allocation of costs of preparing Form PF; and other challenges presented by the form.  This article summarizes the key takeaways from the seminar.

Schulte Partner Stephanie Breslow Discusses Hedge Fund Liquidity Management Tools in Practising Law Institute Seminar

“Liquidity” describes the frequency with which investors can get their money back from a hedge fund.  Typically, the governing documents of a hedge fund contain default liquidity provisions and a set of mechanisms the manager can use to vary those default provisions.  For example, the default provisions may say that investors can redeem from the fund quarterly, but the documents may also permit the manager to reduce, delay or recharacterize redemption requests.  Conceptually, liquidity management tools are motivated by investment and equitable considerations: it is difficult to execute an investment program on a fickle capital base, and a manager’s fiduciary duty flows to all investors in a commingled vehicle.  In practice, however, investors are rarely happy to hear that they cannot get their money back.  Prior to the 2008 financial crisis, liquidity management tools in hedge fund governing documents were effectively viewed as boilerplate: present, but rarely used.  Then credit markets seized up, liquidity dried up and everybody needed cash – investors for their own investors or beneficiaries, managers to satisfy redemptions, banks to remain solvent, etc.  Managers blew the dust off long dormant provisions in governing documents and actually imposed gates, suspended redemptions and use other heretofore unthinkable techniques to manage liquidity.  The financial crisis has passed, but liquidity management remains an important topic in the hedge fund industry.  Liquidity issues are often micro rather than macro, and, in any case, post-crisis documents have been drafted with a view to the next macro event.  Recognizing the ongoing importance of liquidity management in hedge fund governance, Stephanie R. Breslow presented a session on the topic at the Practising Law Institute’s September 5, 2012 “Hedge Funds 2012” event.  Breslow is a partner in the New York office of Schulte Roth & Zabel LLP, co-head of Schulte’s Investment Management Group and a member of the firm’s Executive Committee.  Breslow’s session focused on, among other topics: developments in fund liquidity terms since the 2008 financial crisis; tools available to a fund manager for managing liquidity risk, including the right to suspend redemptions, fund-level gates, investor-level gates, side pockets and in-kind distribution of assets; duties owed by a fund manager in the context of a liquidity crisis; the evolution in fund manager attitudes towards secondary market transactions in fund interests and shares; and why fund investors have not pushed for the right to remove fund managers in fund governing documents during liquidity crises.  This article summarizes key points from Breslow’s session.

Aite Group Report Maps Outsourcing Landscape for Hedge Fund Managers, Including Outsourced Services Offered, Trends, Goals, Drawbacks and Provider Profiles

Independent research and advisory firm Aite Group LLC recently prepared a report entitled “Outsourcing Services Landscape for Investment Managers.”  The report draws insights from five major providers of business function outsourcing services to hedge fund managers and traditional asset managers.  The survey focused primarily on business function outsourcing (such as back office services) as opposed to technology outsourcing.  The report describes the evolution of the outsourcing landscape; the goals and drawbacks of outsourcing; recent trends in outsourcing, the types of services that can be outsourced; and the types of outsourcing services available.  The report also summarizes the services offered by each survey participant, how many outsourcing clients each provider has and what percentage of those clients are alternative investment managers.  This article summarizes the chief considerations for hedge fund managers when making outsourcing decisions, as outlined in the report.

Hedge Funds Win Battle to Enforce Argentina’s Defaulted Bonds as Second Circuit Upholds Ruling that Argentina Violated Pari Passu Clause by Paying on New Bonds While Refusing to Pay on Defaulted Bonds

The U.S. Court of Appeals for the Second Circuit (Court) has affirmed the ruling of the U.S. District Court for the Southern District of New York (District Court) that Argentina violated the pari passu clause in its Fiscal Agency Agreement Bonds (FAA Bonds) when it refused to pay holdout FAA Bond holders who had not exchanged their bonds in recent exchange offers.  Plaintiffs in this suit include hedge funds NML Capital, Ltd. and Olifant Fund, Ltd., several funds managed by Aurelius Capital Management, L.P. and several individual owners of FAA Bonds.  Plaintiffs claim that they are owed $1.3 billion in unpaid principal and interest on their FAA Bonds.  While agreeing that Argentina may not refuse to pay on the defaulted FAA Bonds while making payments on newly issued bonds, the Court remanded the case to the District Court for clarification on how its injunctions requiring Argentina to make payments on all of its bonds “ratably” would operate and how those injunctions would affect third party intermediary banks.  This article summarizes the Court’s decision and reasoning.  For our previous coverage of related litigation, see “United Kingdom’s High Court Finds Argentina’s Sovereign Immunity Doctrine Cannot Prevent a Hedge Fund from Seeking to Enforce an American Judgment against Argentina in English Courts,” Hedge Fund Law Report, Vol. 4, No. 25 (Jul. 27, 2011); and “If a Hedge Fund Holder of Defaulted Sovereign Debt Obtains a Judgment Against the Defaulting Sovereign, What Assets Can the Hedge Fund Go After to Satisfy the Judgment?,” Hedge Fund Law Report, Vol. 4, No. 21 (Jun. 23, 2011).

Tribune Bankruptcy Highlights the Importance of Close Reading of Indenture Agreements by Hedge Funds That Trade Bankruptcy Claims or Distressed Debt

The interpretation of language contained in indenture agreements that are often entered into years prior to a bankruptcy filing of the borrower will significantly impact the ultimate recovery by noteholders – as demonstrated by the ongoing saga involving the Tribune Company.  In a guest article, Richard J. Corbi of Lowenstein Sandler PC provides an analysis of developments in the Tribune bankruptcy relevant to hedge funds that invest in distressed debt, bankruptcy claims and related instruments.

Brian Daly Joins Schulte Roth & Zabel’s Regulatory & Compliance Practice

On November 12, 2012, Schulte Roth & Zabel announced that Brian T. Daly has joined the firm as a partner in its Investment Management and Regulatory & Compliance groups.

Dechert Boosts Luxembourg and Pan-European Financial Services Practice with Partner Patrick Goebel

On November 12, 2012, Dechert LLP announced that Patrick Goebel has joined the firm’s financial services and investment management group as a partner in Luxembourg.  For a discussion of trends involving Luxembourg fund structures, regulation and marketing, see “How Can Hedge Fund Managers Use Luxembourg Funds to Access Investors and Investments in Europe, Asia and Latin America?,” Hedge Fund Law Report, Vol. 5, No. 27 (Jul. 12, 2012).

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