Jan. 3, 2013

RCA Session Covers Transparency, Liquidity and Most Favored Nation Provisions in Hedge Fund Side Letters, and Due Diligence Best Practices

The Regulatory Compliance Association, in cooperation with major law firms and institutional investors, recently presented a Practice Readiness Series session entitled “Navigating the Side Letter and Due Diligence Process” (Session).  The Session focused on issues involved in negotiating hedge fund side letters from the perspectives of hedge fund managers and investors.  It also reviewed due diligence from both perspectives, highlighting the categories of due diligence performed by institutional investors and best practices for managers when responding to due diligence requests.  This article summarizes the key points made during the Session.

Citi Prime Finance Report Dissects the Expenses of Running a Hedge Fund Management Business, Identifying Components, Levels, Trends and Benchmarks

Citi Prime Finance (Citi) recently released its “Citi Prime Finance Hedge Fund Business Expense Survey,” a follow up on and expansion of previous reports on hedge fund industry expenses.  The report provides an independent analysis of the various costs associated with operating a hedge fund management business; identifies trends and patterns within those expenses among different categories of hedge fund managers; and provides benchmarks so that hedge fund managers can ascertain whether their expense levels are above or below the expense levels of similarly situated peers.  This article details key findings outlined in the report.  For a discussion of another useful Citi analysis of trends in the hedge fund industry, see “Citi Prime Finance Survey Predicts Hedge Fund Industry Assets Will Nearly Double by 2016 and Highlights Opportunities for Hedge Fund Managers to Grow Assets Under Management,” Hedge Fund Law Report, Vol. 5, No. 25 (Jun. 21, 2012).

Why and How Do Family Offices and Foundations Invest in Hedge Funds?

Family offices and foundations are an important source of investment capital for hedge funds and funds of funds (together, funds), particularly funds whose managers have a track record, well-developed infrastructure and the ability to demonstrate staying power.  See “Prime Broker Merlin Securities Develops Spectrum of Hedge Fund Investors; Event Hosted by Accounting Firm Marcum LLP Examines Marketing Implications of the Merlin Spectrum,” Hedge Fund Law Report, Vol. 3, No. 39 (Oct. 8, 2010).  However, family offices and foundations have specific objectives in investing in hedge funds and specific concerns with their hedge fund investments.  Understanding these objectives and concerns is important to hedge fund managers because effective fund marketing should be a refined process rather than a blunt instrument.  Marketing that raises long-term dollars invariably caters to the specific circumstances of an investor rather than generally (or only) touting the achievements of the manager.  This is particularly true in marketing to family offices – entities that often have a range of objectives including but not limited to absolute returns.  See “New Rothstein Kass Study Explains the ‘Consultative’ Approach to Marketing to Single-Family Offices and the Importance of That Approach for Smaller Hedge Fund Managers,” Hedge Fund Law Report, Vol. 4, No. 20 (Jun. 17, 2011).  To help hedge fund managers enrich their understanding of the goals and concerns of family offices and foundations, this article describes the pertinent findings from a December 2012 survey of family offices and foundations conducted by Infovest21.  In particular, this article discusses the survey findings on topics including fund fees, allocation criteria, role of assets under management in manager selection, transparency and related topics.

SEC Charges Hedge Fund Manager and Its Founder with Securities and Investment Adviser Fraud Based on “Cherry Picking” of Trades

The SEC has clearly communicated its commitment to scrutinizing how hedge fund managers are identifying and managing conflicts of interest specific to their businesses.  See, e.g., “Davis Polk ‘Hedge Funds in the Current Environment’ Event Focuses on Establishing Registered Alternative Funds, Hedge Fund Manager M&A and SEC Examination Priorities,” Hedge Fund Law Report, Vol. 5, No. 24 (Jun. 14, 2012).  One of the conflicts most commonly cited by the SEC is the fair and equitable allocation of investment opportunities by a hedge fund manager among its clients and proprietary accounts.  The SEC’s concern with conflicts raised by allocations has been emphasized in speeches, letters and compliance outreach programs; and is evidenced by an enforcement action recently commenced by the SEC against an investment advisory and hedge fund management firm and its principal.  This article summarizes the allegations, charges and relief sought in the SEC’s complaint.  See also “How Can Hedge Fund Managers Avoid Criminal Securities Fraud Charges When Allocating Trades Among Multiple Funds and Accounts?,” Hedge Fund Law Report, Vol. 4, No. 19 (Jun. 8, 2011).

How Can Hedge Fund Managers Identify, Mitigate and Insure Against Cyber Security Threats?

On December 4, 2012, a webcast jointly sponsored by insurance brokerage firm Maloy Risk Services; insurer Chubb & Son; and Internet security software developer Trend Micro, provided an overview of the current cyber “threat landscape,” highlighted the critical need to vet the cyber defenses of third party service providers, and discussed insurance coverage available with respect to cyber attacks.  This article summarizes the key points from the webcast that are most relevant to hedge fund managers and includes a due diligence checklist for managers to verify cyber security measures taken by third party vendors.

Equity Derivatives and Sales and Trading Lawyer Will Iwaschuk Joins Morgan Lewis

On January 2, 2013, Morgan Lewis announced that Will Iwaschuk, a leading equity derivatives and equity sales and trading attorney, has joined the firm as a partner in its Investment Management and Securities Industry practice, resident in the New York office.