Nov. 13, 2014

Eight Key Elements of an Integrated, Efficient and Accurate Hedge Fund Reporting Solution

Alternative asset managers are faced with an unprecedented demand for reporting.  Prior to 2012, investment managers issued as few as six reports per year.  However, given new legislation and regulations as a result of the financial crisis, managers now potentially face filing more than 60 reports per year, including investor reports and due diligence reports, Forms PF, CPO-PQR, AIFMD, TIC-S, SLT, TIC-B, SEC 13F, Solvency II and Basel III, plus CFTC and EMIR derivative reporting, among others.  In addition to the number of reports that need to be filed, all of them need to be completed quickly.  What is worse is that they are not spaced out evenly over the year and tend to come due at the same time.  Consequently, firms need to devote extra resources during peak reporting times, only to then redeploy them during lulls.  This makes efficiency difficult to achieve.  Only a systematic, thoughtful and holistic approach can bring efficiencies to these demanding reporting requirements.  In a guest article, John Sampson, an executive director in the Financial Services Office of Ernst & Young LLP, describes an eight step framework for an integrated, effective and repeatable hedge fund reporting solution.

K&L Gates Partners Identify Four Insider Trading Enforcement Trends with Direct Impact on Hedge Fund Trading Strategies (Part One of Three)

This article is the first in a three-part series discussing practical insights from a recent presentation on insider trading by K&L Gates partners Michael W. McGrath, Carolyn A. Jayne and Nicholas S. Hodge.  In particular, this article provides background on the aspects of insider trading doctrine most relevant to hedge fund managers (including entity liability and special considerations for CFA charter holders), then outlines four enforcement trends that bear directly on hedge fund trading strategies and operations.  The second article in this series will detail eight prophylactic measures that hedge fund managers can implement to avoid insider trading violations.  The third article in this series will make recommendations to hedge fund managers for amending their compliance programs in light of lessons from recent insider trading enforcement actions.  For more on insider trading issues relevant to hedge fund managers, see “‘Best Ideas’ Conference Presentations: Challenges Faced by Hedge Fund Managers Under Federal Securities Law (Part One of Two),” Hedge Fund Law Report, Vol. 7, No. 30 (Aug. 7, 2014).

How Is Goldman Unwinding Its Private Fund Investment Program in Light of the Volcker Rule?

The Volcker Rule (Rule), adopted as part of the Dodd-Frank Act, prohibits banks from engaging in proprietary trading and from owning or sponsoring certain hedge funds and other private funds.  Final regulations under that Rule were issued at the end of 2013, and banks have been taking steps to assure that they comply with the Rule.  In a recent public filing, The Goldman Sachs Group, Inc. (Goldman) detailed the mechanics of its compliance with the Rule, including how it is divesting itself of ownership of covered funds; the role of secondary market transactions in Goldman’s divestiture program; how Goldman will treat uncalled capital commitments; its withdrawal of financial support for covered funds; its move away from proprietary trading; calculation of metrics required by the Rule; and the impact of Goldman’s reduction of covered fund interests on its supplementary leverage ratio.  For similarly situated institutions, Goldman’s approach to Volcker Rule compliance is a useful benchmark.  For hedge fund and fund of funds managers, Goldman’s explanation of its private fund divestiture program and its other disclosures may offer insight into secondary market purchase opportunities, inform prime brokerage agreement negotiations and provide other useful insight.  See “Key Structuring and Negotiating Points in Secondary Sales of Private Fund Interests,” Hedge Fund Law Report, Vol. 7, No. 11 (Mar. 21, 2014).  This article provides background on the Rule and summarizes the sections of Goldman’s recent disclosure relevant to its compliance with the Rule.  For a discussion of the types of funds that banking entities may still invest in, see “Options Under the Volcker Rule for Bank Investment in Unaffiliated Private Equity and Hedge Funds,” Hedge Fund Law Report, Vol. 7, No. 9 (Mar. 7, 2014).  See also “Aligning Employee and Investor Interests under the Volcker Rule,” Hedge Fund Law Report, Vol. 7, No. 21 (Jun. 2, 2014).

Ten Steps That Hedge Fund Managers Can Take to Maximize the Tax Deductibility of Settlement Payments (Part Two of Two)

Tax structuring is a concept more often associated with business transactions than with legal settlements.  But in a recent presentation, Shearman & Sterling partner Lawrence M. Hill highlighted the fundamental role of tax in the net economics of legal settlements.  Informed tax structuring can dramatically reduce the dollars that go out the door in a legal settlement, and tax counsel (like litigation counsel) can powerfully affect the economics of settlements.  In his presentation, Hill discussed ten specific strategies that private fund managers and other business entities can use to maximize the tax deductibility of legal settlements.  This article – the second in a two-part series – describes those ten strategies in detail.  The first article in this series offered a comprehensive overview of the law governing taxation of settlements.  For private fund managers, understanding these principles and implementing them during settlement negotiations can conserve resources, preserve reputation, save time, limit the use of directors and officers and other insurance and avoid the use of indemnification and exculpation provisions in governing documents.

Investment, Regulatory and Operational Considerations for Hedge Fund Managers Considering Peer-To-Peer Lending

Non-bank lenders – notably including hedge funds – are playing a growing role in the provision of credit to businesses and individuals.  This is a function of various factors: an increasingly heavy regulatory hand on banks post-crisis; higher bank capital requirements; increased risk aversion; persistently low interest rates; and regulatory changes in some jurisdictions facilitating direct lending.  See, e.g., “Irish Central Bank Issues Proposed Rules to Enable Private Funds to Originate Loans,” Hedge Fund Law Report, Vol. 7, No. 34 (Sep. 11, 2014).  As part of this trend, hedge fund managers are exploring and in some cases lending through so-called “peer-to-peer” lending (P2PL) channels.  Whether characterized as an “asset class” or merely a new or somewhat new mechanism for an age-old practice (lending money), P2PL has received significant attention and generated cautious interest among hedge fund managers.  To clarify the discussion around P2PL, this article relates the salient points from a presentation at a recent event on peer-to-peer lending, organized by the Institute for International Research (the same entity that organizes the popular GAIM conferences on hedge fund operations).  This article specifically provides background on the forces fueling P2PL growth, outlines relevant regulatory considerations and weighs the pros and cons for hedge fund managers of participation in P2PL strategies.

Jim Gregory Joins Lowenstein Sandler to Focus on Executive Compensation for Private Fund Manager Clients

On November 10, 2014, Lowenstein Sandler LLP announced the expansion of its executive compensation team for its private equity, hedge fund, venture capital and other clients with the addition of James E. Gregory as a partner in the firm’s New York office.  For insight from Lowenstein, see “A Practical Guide to the Implications of Derivatives Reforms for Hedge Fund Managers,” Hedge Fund Law Report, Vol. 6, No. 29 (Jul. 25, 2013).  On compensation trends in the hedge fund industry, see “How Much Are Hedge Fund Manager General Counsels and Chief Compliance Officers Paid?,” Hedge Fund Law Report, Vol. 7, No. 28 (Jul. 24, 2014).

Matthew Anderson Joins Weaver to Open L.A. Office

Weaver, the largest independent accounting firm in the Southwest, recently announced its expansion to the West Coast.  Matthew Anderson, previously with Rothstein Kass, joins Weaver as an audit partner and will launch the firm’s Los Angeles office.  For insight from Weaver, see “How Can Liquid Hedge Funds Be Structured to Accommodate Investments in Illiquid Assets?,” Hedge Fund Law Report, Vol. 4, No. 4 (Feb. 3, 2011); “IRS ‘Managed Funds Audit Team’ Steps Up Audits of Hedge Funds and Hedge Fund Managers, and Investigations of Hedge Fund Tax Compliance Issues,” Hedge Fund Law Report, Vol. 2, No. 34 (Aug. 27, 2009).