Dec. 6, 2012

Benefits and Burdens to Hedge Fund Managers of Speaking to the Media (Part Two of Two)

After decades of reluctance, hedge fund managers are starting to talk to the media – a trend fueled by legal and business changes.  On the legal side, final rules under the Jumpstart Our Business Startups (JOBS) Act will implement the repeal of the ban on general solicitation and advertising for hedge funds that rely on Regulation D.  On the business side, the enhanced negotiating clout of investors has required managers to distinguish their product and service offerings.  There are at least six distinct benefits to hedge fund managers of talking to the media, as catalogued in the first article in this series.  See “Benefits and Burdens to Hedge Fund Managers of Speaking to the Media (Part One of Two),” Hedge Fund Law Report, Vol. 5, No. 45 (Nov. 29, 2012).  However, talking to the media can also involve a range of regulatory, business, reputational and other risks.  This is the second article in our two-part series designed to help hedge fund managers decide whether to talk to the media and, if they do, how to identify and manage the attendant risks.  In particular, this article discusses the various downsides of speaking with the media; situations in which fund managers should avoid speaking to the media; and six best practices for minimizing the range of risks posed by communications between hedge fund manager principals and employees and the media.

Application of the QPAM and INHAM ERISA Class Exemptions to Hedge Fund Managers

The Employee Retirement Income Security Act of 1974 (ERISA) and the plan asset regulations generally provide that when a “benefit plan investor” acquires an equity interest in an entity, other than a public operating company or a registered investment company, all of the assets of that entity are deemed to be “plan assets” subject to ERISA and related provisions of the Internal Revenue Code of 1986 (IRC), unless an exception applies.  However, investments by benefit plan investors in a hedge fund would generally not constitute plan assets (thereby subjecting the hedge fund and its manager to ERISA and related IRC provisions) unless such benefit plan investors own 25% or more of any class of equity securities issued by the fund.  See “Applicability of New Disclosure Obligations under ERISA to Hedge Fund Managers,” Hedge Fund Law Report, Vol. 5, No. 9 (Mar. 1, 2012).  Once subject to ERISA, a fund and its manager may not engage in certain specified “prohibited transactions,” including transactions with “parties in interest,” which may include the fund’s brokers and counterparties pursuant to Section 406(a) of ERISA.  Many fund managers rely on a class exemption for funds that are managed by a “qualified professional asset manager” (QPAM).  A recent panel, including participants from FTI Consulting and K&L Gates, reviewed the QPAM exemption and the parallel exemption for an “In-House Asset Manager” (INHAM).  The panel described the conditions for reliance on the QPAM and INHAM class exemptions and also focused on the audit requirement that is an important component of the exemption when a QPAM or INHAM manages its own retirement plan.  This article summarizes the key points from the panel discussion.

Measures Hedge Fund Managers Can Implement to Maximize Protection of Their Trade Secrets

Hedge fund managers have a well-documented interest in maintaining the confidentiality of client lists, investment strategies and other sensitive business information – information that courts are increasingly recognizing as trade secrets.  But most of the caselaw relating to trade secrets arises in the technology industry and therefore has limited applicability to hedge fund managers.  The facts of technology cases often bear little resemblance to the operations of hedge fund managers, and the lessons to be derived from such cases are often cost-prohibitive or structurally distinguishable.  How can the lessons of trade secrets jurisprudence be analogized and adapted to the hedge fund industry?  In a guest article, Ben Quarmby, a partner at litigation boutique MoloLamken LLP, does just that – examining relevant law and research, and extracting specific measures that hedge fund managers can implement to protect their trade secrets.  Quarmby concludes that some of the cheapest and most easily implemented trade secret protections are among the most effective – a conclusion that may surprise some managers, but that should be welcome news in an environment of generally rising costs.

CFTC Grants Permanent No-Action Relief from CPO Registration for Family Offices and Temporary No-Action Relief for Operators of Funds of Funds

The February 2012 CFTC rule amendments implementing provisions of the Dodd-Frank Act raised many questions concerning the obligations of fund of fund operators and family offices to register as commodity pool operators (CPOs) with the CFTC, particularly in light of the rescission of the Rule 4.13(a)(4) registration exemption relied upon by many fund of fund operators and family offices.  Recognizing that many fund of fund operators and family offices may need to register as CPOs with the CFTC by December 31, 2012, on November 29, 2012, the Division of Swap Intermediary Oversight (Division) of the CFTC issued two no-action letters, one granting temporary relief from CPO registration for operators of funds of funds and one granting permanent no-action relief for family offices.  However, the relief for fund of fund operators and family offices is not self-executing as potential claimants must make an electronic notice filing with the CFTC and satisfy other conditions to claim the relief.  This article outlines the relief granted by the Division in its no-action letters and the conditions that fund of fund operators and family offices must satisfy to claim such relief.  See also “Practising Law Institute Panel Discusses Sweeping Regulatory Changes for Hedge Fund Managers That Trade Swaps,” Hedge Fund Law Report, Vol. 5, No. 45 (Nov. 29, 2012).

United Nations White Paper Explains How Hedge Fund Investors Can Layer Environmental, Social and Governance Factors into Manager Selection

There has been a surge of recent interest in “responsible investment” in and by hedge funds.  However, the meaning of “responsible investment” is still being developed.  The term broadly refers to the integration of environmental, social and governance (ESG) investment criteria; and hedge fund managers are increasingly incorporating ESG factors into their investment strategies.  See “More Hedge Funds Are Employing Environmental, Social and Governance Investment Criteria,” Hedge Fund Law Report, Vol. 4, No. 39 (Nov. 3, 2011).  However, there is little consensus on the impact of incorporating ESG criteria into hedge fund investments and strategies, or how to do so most efficiently and effectively.  In 2006, the United Nations (U.N.) Secretary-General launched the Principles for Responsible Investment (PRI), a set of aspirational standards designed to guide investors towards creating a sustainable global financial system that fosters good governance, transparency, integrity and accountability.  Hedge funds are important investment vehicles for many signatories to the PRI initiative.  To assist its signatories in their hedge fund investments, PRI recently issued a white paper discussing how hedge funds can incorporate ESG criteria into their investment strategies and how hedge fund investors can incorporate ESG factors into manager selection.  This article provides (1) an overview of PRI’s paper, including its assessment of the advantages and risks of various hedge fund investment techniques and strategies for ESG investors, and (2) a roadmap for responsible investment in and by hedge funds.

U.S. District Court Rules in Favor of FAA Bondholders in Dispute with Argentina in Clarifying the Scope of Its Injunctions Requiring Argentina to Make “Ratable” Payments on FAA Bonds

On November 21, 2012, Judge Griesa of the U.S. District Court for the Southern District of New York ruled in favor of the holders (including certain hedge funds) of Fiscal Agency Agreement bonds (FAA Bonds) defaulted upon by the Republic of Argentina when he clarified the scope of payment obligations owed by Argentina to such holders (FAA Bondholders).  Judge Griesa’s ruling followed the October 26, 2012 decision of the U.S. Court of Appeals for the Second Circuit affirming the District Court’s earlier determination that Argentina had violated the pari passu clause with respect to its FAA Bonds when it refused to pay holdout FAA Bondholders who had declined to exchanged their FAA Bonds for newly issued bonds.  For a discussion of the Court of Appeals’ decision, see “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,” Hedge Fund Law Report, Vol. 5, No. 43 (Nov. 15, 2012).

Preqin Hedge Fund Spotlight Looks at Growth in CTA/Managed Futures Funds, and Contrasts Their Performance to Hedge Funds

Recent research by Preqin Ltd. focused on growth trends relating to funds managed by commodity trading advisers that employ commodity trading strategies (CTA funds).  Preqin discussed the utility of CTA funds in hedging against market crises and noted how their performance differs from hedge funds.  This article summarizes the key takeaways from that research.

KPMG Boosts Alternative Investment Funds Practice with West Coast Additions

On December 5, 2012, KPMG, LLP announced the addition of several new hires to its Alternative Investment Funds practice in Los Angeles and San Francisco.  See also “Survey by AIMA and KPMG Identifies the Key Drivers of the Bifurcation of the Hedge Fund Industry Between Larger and Smaller Managers,” Hedge Fund Law Report, Vol. 5, No. 21 (May 24, 2012).

Fredrick Scuteri Named Chief Operating Officer of Israel A. Englander & Co.’s Prime Services Division

On December 3, 2012, international derivatives brokerage firm Israel A. Englander & Co. LLC announced the hiring of Fredrick Scuteri as Chief Operating Officer of its Prime Services division.