Jun. 6, 2013

Why and How Do Hedge Fund Managers Set Minimum Subscription Amounts? (Part One of Two)

If hedge fund investor capital is so hard to raise these days, shouldn’t managers take any capital they can get?  The short answer is, not if one dollar of investor capital costs two dollars in administrative fees, three dollars in litigation costs or four dollars in reputational impairment.  While ubiquitous in PPMs and thus largely ignored, hedge fund investment minimums nonetheless play an important role in hedge fund operations, marketing and portfolio management.  Such minimums communicate information about the manager, its investor base and its goals; both facilitate and constrain performance; impact the pace and quantity of capital raising; and influence the manager’s ability to manage liquidity.  Investment minimums are more important than generally understood, yet they have received a minimum of attention.  This two-part article series remedies that omission by focusing squarely and deeply on hedge fund investment minimums.  This article – the first in the series – outlines key legal, business, and investment rationales for setting hedge fund investment minimums.  Part two of this series will discuss market terms and trends for investment minimums as well as mechanics of implementing, enforcing, waiving and modifying minimum subscription amounts.

FRA Conference Juxtaposes Manager and Investor Perspectives on Hedge Fund Due Diligence (Part Two of Two)

Financial Research Associates LLC recently hosted a two-day seminar entitled “Hedge Fund Due Diligence Master Class.”  This is the second article in a two-part series extracting and summarizing key lessons from the event.  Specifically, this article discusses counterparty risk and valuation issues, recent regulatory developments impacting due diligence, strategic planning for sustainable due diligence programs, evolution of the due diligence process and manager perspectives on due diligence.  The first installment discussed red flags that investors should look for during diligence, the tension between increased portfolio transparency and protection of a manager’s proprietary information and investor perspectives on enterprise risk management by managers.  See “FRA Conference Juxtaposes Manager and Investor Perspectives on Hedge Fund Due Diligence (Part One of Two),” Hedge Fund Law Report, Vol. 6, No. 22 (May 30, 2013).

Coercive Exchanges: How Hedge Fund Noteholders Can Salvage Value Under Duress

Issuers are closing transactions that effectively change the character of their notes without soliciting input or consent from noteholders holding a significant portion (albeit a minority) of the issuance, often leaving such holders with illiquid investments whose value has declined, sometimes materially, as a result of the issuer’s financial engineering.  Fortunately, minority noteholders have recourse if they act quickly.  Although each situation and indenture presents different challenges and opportunities requiring a specifically tailored response and litigation strategy, in general, noteholders have various arguments at their disposal.  In a guest article, Andreas P. Andromalos, a partner at Brown Rudnick LLP, and Gabriel N. Carreiro and Patrick G.H. Mott, both associates at Brown Rudnick, detail those arguments, the stakes and the supporting caselaw.

Why and How Do Middle Eastern Sovereign Wealth Funds, Pension Funds and High Net Worth Individuals Invest in Private Funds?

International investment manager Invesco Asset Management Limited recently published a report shedding light on the profiles of and investment preferences of various types of investors in the Middle East.  Specifically, the report described “investment” and “development” sovereign wealth funds and their preferences in regard to private equity investments, the emergence of sovereign pension funds, the investment preferences of ultra-high net worth individuals and regional capital flows.  The report provides valuable insight for private fund managers looking to understand and source investments from these investor segments in the Middle East.  This article summarizes key findings of Invesco’s report.  See also “Why and How Do Sovereign Wealth Funds Invest in Hedge Funds?,” Hedge Fund Law Report, Vol. 6, No. 13 (Mar. 28, 2013).

U.S. Supreme Court Declines to Review District Court Decision Holding that Collective Action by Hedge Funds in Pressing Issuer to Redeem Its Long-Term Notes at Par Did Not Violate Antitrust Laws

Many hedge funds pursue strategies that involve trading in the debt of distressed companies.  Those funds occasionally work together to renegotiate payments on such debt with the issuer, often in the context of the issuer’s bankruptcy.  In 2011, an issuer struck back at the hedge funds that were accumulating its debt, claiming that they had conspired to increase the price of its debt in violation of the Sherman Antitrust Act.  This article summarizes the factual background of the litigation over the issuer’s notes and the legal analysis of federal courts at various levels.  For discussion of an attack on collective action by holders of distressed debt that did not involve antitrust claims, see “Motors Liquidation Company Suit against Hedge Funds Holding Distressed Debt of General Motors Nova Scotia Finance Company Goes to Trial,” Hedge Fund Law Report, Vol. 5, No. 33 (Aug. 23, 2012).

TheCityUK Report Discusses Trends in Hedge Fund Manager Locations, Fund Domiciles, Performance, Strategies, Investors, Secondary Market Transactions and Service Providers

TheCityUK (TCUK), an association of representatives from the U.K. financial services sector and other businesses, recently released a report providing an overview of recent trends in the global hedge fund industry, broken down by geography, with a focus on the role of managers and funds based in the U.K.  Specifically, the report provided a geographical breakdown of funds and managers; a snapshot of fund performance and investment strategies; a synopsis of fund manager concerns; recent information on secondary market transactions in hedge fund interests; and perspectives on the use of hedge fund service providers.  This article summarizes the primary insights from the report.

Herbert Smith Freehills Funds Partner Moves to Bingham in London

Bingham McCutchen has hired Herbert Smith Freehills global funds partner Thiha Tun in a lateral appointment for the U.S. firm’s City base.

Wells Fargo Securities Forms Client Trade Services Group and Names Eamon McCooey Head of Prime Services

On June 4, 2013, Wells Fargo Securities announced the formation of a new Client Trade Services group within Wells Fargo Securities’ Markets division.  In addition, Wells Fargo Securities announced that Eamon McCooey will be joining the group as head of Prime Services.  See “Prime Brokerage Arrangements from the Hedge Fund Manager Perspective: Financing Structures; Trends in Services; Counterparty Risk; and Negotiating Agreements,” Hedge Fund Law Report, Vol. 6, No. 2 (Jan. 10, 2013).