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    Jun. 11, 2015

Modified High Water Mark Provisions May Be Difficult for Managers to Market and Implement (Part Two of Two)

Hedge fund managers unable to subsist entirely on management fees may risk losing key investment personnel without receiving (and therefore being able to offer key people part of) any incentive compensation.  Traditional high water mark provisions – which prevent hedge fund managers from receiving any incentive or performance fees until prior losses are recouped – can result in managers going years without performance compensation, even after they have begun to turn the fund’s performance around.  To alleviate this pressure, some managers may consider using modified high water mark provisions, allowing them to receive lower amounts of incentive compensation during periods when the fund remains below its high water mark.  However, such provisions are not common in the hedge fund industry and may impact the marketability of the manager’s fund, especially as investors continue to place increasing pressure on hedge fund fees.  See “Deutsche Bank Alternative Investment Survey Explores Fees and Liquidity Trends, the Landscape for Investment Intermediaries and Early Stage Investment Terms (Part Two of Two),” Hedge Fund Law Report, Vol. 8, No. 22 (Jun. 4, 2015).  This second article in a two-part series discusses the industry prevalence of and investor reception to modified high water marks and examines issues that hedge fund managers should consider before implementing a modified high water mark.  The first article analyzed elements of modified high water mark provisions and explored the benefits of such provisions.

Costs and Structures of Hedge Fund Management Liability Insurance Policies

Hedge fund managers’ demand for management liability insurance is rising in response to increasing regulatory scrutiny, market volatility and fiduciary responsibilities of hedge fund managers and directors.  The good news is that insurance prices are falling, thanks to heated competition among insurance carriers.  In a recent interview with the Hedge Fund Law Report, Richard A. Maloy, Jr., Chairman and Chief Executive Officer of Maloy Risk Services, shared his expertise on the hedge fund management liability insurance market, including the types of management liability insurance purchased by hedge fund managers, the costs of such coverage, common practices with respect to negotiating insurance policies and the interaction of insurance with fund indemnification policies.  For more on hedge fund management liability insurance, see “Hedge Fund Insurance Benchmarking Survey Reveals Trends and Views Concerning Insurance Purchasing, Pricing, Coverage Limits, Frequency of Claims and Quality of Claims Service,” Hedge Fund Law Report, Vol. 5, No. 27 (Jul. 12, 2012); and “Hedge Fund D&O Insurance: Purpose, Structure, Pricing, Covered Claims and Allocation of Premiums Among Funds and Management Entities,” Hedge Fund Law Report, Vol. 4, No. 41 (Nov. 17, 2011).

What Hedge Funds Need to Know About Tax Relief Under the New Australian Investment Manager Regime

A new Australian investment manager regime (IMR) is set to take effect on July 1, with possible retroactive effect to 2011.  Following the U.K. Investment Manager Exemption model, the IMR is intended to provide eligible foreign investors with relief from Australian tax with respect to most investments in Australia.  In a guest article, Nikki Bentley and Seema Mishra, partner and special counsel, respectively, at Henry Davis York, discuss the history and current status of the IMR provisions; elements and scope of Australian tax exemptions under the IMR; certain considerations when establishing a hedge fund in Australia under the IMR; the potential impact of the IMR on the hedge fund industry in Australia; and a comparison of the Australian IMR to other similar regimes.  For more on the Australian IMR, see “Key Hedge Fund Tax Developments in the U.K., the European Union, Ireland, Germany, Spain, Australia, India and Puerto Rico,” Hedge Fund Law Report, Vol. 6, No. 26 (Jun. 27, 2013).

Liquidators of Cayman Islands Funds Sue Bank in Bid to Claw Back $80 Million

The liquidators of a Cayman Islands master fund and feeder fund (together, the Funds) recently commenced an adversary proceeding in the U.S. Bankruptcy Court for the Southern District of New York seeking to recover more than $80 million from one of their financing banks under the fraudulent conveyance laws of both the Cayman Islands and New York State.  In the complaint, the Funds allege that the defendant bank played a “pivotal role” in the alleged fraud perpetrated by the manager of the fund and its founder and principal, which was the subject of a 2010 SEC enforcement action.  This article summarizes the background facts and the plaintiffs’ allegations against the defendant bank.  For other cases involving Cayman liquidators that sought to use Chapter 15 proceedings, see “Delaware Bankruptcy Court Recognizes Cayman Islands Proceeding as ‘Foreign Main Proceeding’ Under Chapter 15 of the U.S. Bankruptcy Code,” Hedge Fund Law Report, Vol. 3, No. 6 (Feb. 11, 2010); and “Cayman Islands Liquidations of Failed Bear Stearns Hedge Funds Denied Access to U.S. Bankruptcy Court,” Hedge Fund Law Report, Vol. 1, No. 13 (May 30, 2008). 

WilmerHale Attorneys Discuss FCPA Risks Applicable to Private Fund Managers (Part Two of Two)

The financial services industry is under increased scrutiny from anti-corruption enforcement authorities in the U.S. and abroad.  Foreign Corrupt Practices Act (FCPA) enforcement actions have the potential to implicate hedge funds, private fund managers and even fund investors themselves.  Accordingly, hedge fund managers must be aware of FCPA risks and take steps to mitigate them.  See “FCPA Compliance Strategies for Hedge Fund and Private Equity Fund Managers,” Hedge Fund Law Report, Vol. 7, No. 23 (Jun. 13, 2014); and “FCPA Considerations for the Private Fund Industry: An Interview with Former Federal Prosecutor Justin Shur,” Hedge Fund Law Report, Vol. 7, No. 20 (May 23, 2014).  This article, the second in a two-part series, summarizes the main points raised at a recent program regarding FCPA risks threatening private fund managers and summarizes recent FCPA enforcement actions involving financial institutions.  The program featured WilmerHale partners Kimberly A. Parker and Erin G.H. Sloane.  The first article in this series summarized the key points from that presentation regarding the current U.S. and global anti-corruption enforcement climate and the relevant provisions of the FCPA.

IRS Proposes Rules to Limit Reinsurance by Hedge Funds

The IRS recently issued a notice of proposed rulemaking that, if approved, could make it more onerous for hedge fund managers to establish or operate offshore reinsurance companies.  Although hedge fund managers have taken advantage of a carve-out in the rules regarding Passive Foreign Investment Companies and set up reinsurance structures in no-tax and low-tax offshore jurisdictions, the proposed regulations seek to limit that practice by drawing a distinction between companies engaged in “active” reinsurance and those that are merely vehicles used to defer or reduce the tax that would otherwise be due with respect to investment income.  This article summarizes the proposed regulations.  For more on the intersection of hedge fund management and reinsurance, see “Considerations for Hedge Fund Managers Evaluating Forming Reinsurance Vehicles in the Cayman Islands,” Hedge Fund Law Report, Vol. 7, No. 33 (Sep. 4, 2014); and “How Can Hedge Fund Managers Use Reinsurance Businesses to Raise and Retain Assets and Achieve Uncorrelated Returns? (Part Two of Two),” Hedge Fund Law Report, Vol. 6, No. 3 (Jan. 17, 2013).

Investment Management Lawyer Amy Doberman to Join WilmerHale

WilmerHale recently announced that Amy Doberman will join the firm as a partner in its Securities Department and Investment Management Practice in Washington, D.C.  Doberman was most recently general counsel, responsible for all legal and compliance issues, at ProShare Advisors, a $30 billion ETF and mutual fund complex.  For insight from the firm, see “WilmerHale Attorneys Discuss FCPA Concerns for Private Fund Managers (Part One of Two),” Hedge Fund Law Report, Vol. 8, No. 21 (May 28, 2015); Part Two of Two, above in this issue of the HFLR; and “WilmerHale and Deloitte Identify Best Legal and Accounting Practices for Hedge Fund Valuation, Fees and Expenses,” Hedge Fund Law Report, Vol. 6, No. 28 (Jul. 18, 2013).  For more on mutual funds, see “How to Mitigate Conflicts Arising Out of Simultaneous Management of Hedge Funds and Alternative Mutual Funds Following the Same Strategy (Part Three of Three),” Hedge Fund Law Report, Vol. 8, No. 15 (Apr. 16, 2015).

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