Feb. 12, 2015

Seven Tips and Lessons Learned from January 2015 AIFMD Filers

The vast majority of fund managers under the Alternative Investment Fund Managers Directive (AIFMD) have now survived their first filing of the consolidated AIFMD reporting template – commonly referred to as Annex IV.  Fund managers that have yet to file can learn from the experiences of those who just filed in January 2015, for the reporting period that ended on December 31, 2014.  In this guest article, Jeanette Turner, Managing Director & General Counsel at Advise Technologies, LLC, shares useful feedback and lessons learned from hedge and other fund managers that filed in January.  Next Wednesday, February 18, from 10:00 a.m. to 11:00 a.m. EST, Turner will expand on the thoughts in this article in a webinar entitled “Lessons Learned from the January Filing.”  She will be joined in that webinar by Simon Whiteside, a partner at Simmons and Simmons LLP, and Stefanie Kirchheimer, a Director at PwC.  The webinar will be moderated by Hedge Fund Law Report.  To register for the webinar, click here.  For further insight from Turner, see “HFLR-Advise Technologies Panel Explores AIFMD Marketing and Annex IV Reporting Requirements,” Hedge Fund Law Report, Vol. 8, No. 2 (Jan. 15, 2015).  The Hedge Fund Law Report interviewed Turner in “Key Pain Points in AIFMD Annex IV Reporting and Proven Strategies for Surmounting Them,” Hedge Fund Law Report, Vol. 7, No. 44 (Nov. 20, 2014); and she co-authored “A Practical Comparison of Reporting Under AIFMD versus Form PF,” Hedge Fund Law Report, Vol. 7, No. 41 (Oct. 30, 2014).

Why Should Hedge Fund Investors Perform On-Site Due Diligence in Addition to Remote Gathering of Information on Managers and Funds? (Part Three of Three)

On-site visits have become de rigueur in operational due diligence, with many investors putting a high premium on face-to-face meetings with fund managers.  But the difference between a superficial and an effective on-site visit can be profound.  Merely showing up is not sufficient.  In fact, going on site without the right strategy can create the illusion of a “deep dive” without the substance.  Effective on-site due diligence is not just a matter of staying longer, asking more questions and reviewing more documents.  It is a discipline unto itself, with techniques that are proven to work.  Usually, those techniques can only be learned through trial and error.  This article, the third in a three-part series, aims to minimize the “error” part of that learning process by revealing best practices learned by long-time ODD practitioners.  Specifically, this article details: workable and effective on-site diligence procedures, including evaluating cybersecurity programs; red flags to identify; and an investor’s options following the on-site visit.  The first article focused on the rationale for the on-site visit and the mechanics of preparation.  The second article discussed how investors should conduct due diligence visits, and how managers can prepare for them effectively.  See also “Operational Due Diligence from the Hedge Fund Investor Perspective: Deal Breakers, Liquidity, Valuation, Consultants and On-Site Visits,” Hedge Fund Law Report, Vol. 7, No. 16 (Apr. 25, 2014).

Walkers Fundamentals Hedge Fund Seminar Addresses Fund Structuring Trends, Governance Best Practices, Fee and Liquidity Terms, Irish Vehicles, Marketing in Asia and FATCA

Walkers Global recently held its Fundamentals Hedge Fund Seminar in New York City, where experts addressed a range of pressing issues in the industry, including recent developments in fund structuring and common Cayman fund terms; updates on fund governance regulations introduced by the Cayman Islands Monetary Authority and trends in hedge fund governance; implications of the Foreign Account Tax Compliance Act for hedge fund managers; and global hedge fund investment and regulatory trends, particularly in Asia and Ireland.  This article summarizes the key points discussed at the conference on each of the foregoing topics.  For the HFLR’s coverage of Walkers Fundamentals Hedge Fund Seminars from prior years, see: 2013 Seminar; 2012 Seminar; 2011 Seminar; and 2009 Seminar.

Citi Survey Finds Large Drop in Hedge Fund Profitability from 2013 to 2014, Highlighting the Importance of Management Fee Revenue and Its Impact on Product Strategy and Management Company Valuations (Part One of Two)

Citi Business Advisory Services (Citi) recently issued the results of its 2014-15 Annual Hedge Fund Operating Metrics Survey (formerly called The Hedge Fund Business Expense Survey), which focused on hedge fund management fee revenues, operating expenses, operating margins, performance fee income and overall profitability.  In this article, the first of two, we summarize Citi’s methodology, survey demographics and its findings with regard to hedge fund profitability in both 2013 and 2014.  The second article will cover the growing importance of management fees for hedge fund managers and how deriving a greater portion of total profits from management fees may improve a fund manager’s valuation.  For coverage of Citi’s 2013 survey, see “Citi Prime Finance Survey Reveals Levels and Mix of Expenses Incurred by Hedge Fund Managers of Different Sizes, Firm Profitability and Margins, Use of Chargebacks and Impact of Regulations on Expenses,” Hedge Fund Law Report, Vol. 7, No. 1 (Jan. 9, 2014).  For another recent perspective on hedge fund management company expenses, see “Ernst & Young’s 2014 Global Hedge Fund and Investor Survey Considers Growth Areas for Hedge Fund Managers, Related Costs and Challenges, Operating Expenses and Cybersecurity,” Hedge Fund Law Report, Vol. 8, No. 2 (Jan. 15, 2015).

Structuring Hedge Funds to Avoid ERISA While Accommodating Benefit Plan Investors (Part Two of Two)

Pension funds represent a significant source of capital for private fund managers, but if a fund is deemed a “plan assets fund,” ERISA’s strict regulatory regime applies.  Understanding how ERISA works, as well as the exceptions available to those who do not want to be subject to ERISA as a manager of “plan assets,” is crucial for managers.  At a recent New York City Bar event, ERISA practitioners from Simpson Thacher & Bartlett LLP; Proskauer Rose LLP; Skadden, Arps, Slate, Meagher & Flom LLP; and Wachtell, Lipton, Rosen & Katz discussed these issues and other ERISA-related developments applicable to organizing and operating private equity and hedge funds.  This article, the second in a two-part series, addresses drafting fund documents, ERISA-related liability, controlled groups and common control concepts as applied to private equity funds, and implications of the Sun Capital case.  The first article in the series summarized insights from panelists on identifying benefit plan investors and exemptions available to fund managers under ERISA.  See also “Happily Ever After? – Investment Funds that Live with ERISA, For Better and For Worse (Part Five of Five),” Hedge Fund Law Report, Vol. 7, No. 37 (Oct. 2, 2014); “What Should Hedge Fund Managers Expect When ERISA Plans Conduct Due Diligence on and Negotiate for Investments in Their Funds?,” Hedge Fund Law Report, Vol. 6, No. 25 (Jun. 20, 2013).

Investment Firm Pentwater Accuses Baker, Donelson of Fraud in Reneging on Agreement to Defer Fees Owed by a Company to which Pentwater Extended Credit

In January 2014, investment adviser Pentwater Capital Management, L.P. (Pentwater), through certain funds it managed, extended credit to American Standard Energy Corporation (ASEN).  Pentwater claims that, to satisfy a condition to making that loan, ASEN’s counsel, Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C. (Baker), agreed to defer certain legal fees that were owed to it.  That agreement was reflected in a letter agreement between ASEN and Baker.  However, Pentwater claims that Baker surreptitiously replaced that letter agreement with a revised agreement containing more favorable terms.  Pentwater and its funds have sued Baker, asserting several claims of fraudulent misconduct and seeking a declaration that the original letter agreement is binding on Baker.  This article summarizes the facts alleged by the plaintiffs and their specific claims against Baker.  For coverage of another suit by a hedge fund manager against an attorney for allegedly deceptive conduct, see “In Lawsuit by Hedge Fund Manager against Law Firm, the Viability of a Statute of Limitations Defense Turns Not on the Length of the Limitations Period, But on When the Period Starts Running,” Hedge Fund Law Report, Vol. 6, No. 8 (Feb. 21, 2013).

William de Cordova Joins the Hedge Fund Law Report as Editor-in-Chief

William de Cordova recently joined the Hedge Fund Law Report as Editor-in-Chief.  He joins from Investcorp’s New York-based Hedge Fund group, where he served as legal counsel since 2007 and general counsel of Investcorp’s hedge funds business since 2009.

Maria Gattuso and Susan Ameel Join Deloitte’s Risk and Regulatory Advisory Practice

On February 9, 2015, Deloitte & Touche LLP announced the addition of two regulatory senior leaders to its financial services practice.  Maria Gattuso, investment management attorney and most recently a partner at Willkie Farr & Gallagher LLP, joins as principal; and Susan Ameel, former chief regulatory officer of the National Stock Exchange, joins as director.  For insight from Deloitte, see “Tax Practitioners Discuss Taxation of Swaps, Wash Sales, Constructive Sales, Short Sales and Straddles at FRA/HFBOA Seminar (Part Four of Four),” Hedge Fund Law Report, Vol. 7, No. 5 (Feb. 6, 2014); 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).