Mar. 31, 2016

How Are Your Peers Responding to the Most Intrusive Requests From Hedge Fund Investors? (Part Two of Two)

Faced with increasingly intrusive requests for information from current and prospective investors, a hedge fund manager must be prepared to tactfully respond by disclosing an appropriate amount of information while otherwise protecting its business. While a manager may be willing to disclose particular items, it is likely to find itself subject to a growing number of due diligence requests for sensitive information and documents. In an effort to determine industry best practices for responding to such requests, the Hedge Fund Law Report surveyed 20 general counsels and other “C-level” decision-makers at leading hedge fund managers. We present the results of that survey in this two-part article series. The first part described the types of information requests that hedge fund managers are encountering from investors, focusing on the most intrusive requests. This second article explores how managers have actually responded to those requests and what they did to mitigate the potential negative consequences of releasing sensitive information. For more on due diligence, see “Evolving Operational Due Diligence Trends and Best Practices for Due Diligence on Emerging Hedge Fund Managers” (Apr. 18, 2014). For analysis of the investor view of due diligence, see “What Should Hedge Fund Investors Be Looking For in the Course of Operational Due Diligence and How Can They Find It?” (Oct. 13, 2011); and “Legal, Operational and Risk Considerations for Institutional Investors When Performing Due Diligence on Hedge Fund Service Providers” (Jul. 8, 2010).

Liquidity and Performance Representations Present Potential Pitfalls for Hedge Fund Managers

Hedge fund managers must guard against insidious issues that can give rise to conflicts of interest or trigger anti-fraud violations, such as liquidity issues caused by a manager’s operation of multiple funds. See “Operational Conflicts Arising Out of Simultaneous Management of Hedge Funds and Private Equity Funds (Part Two of Three)” (May 14, 2015). Similarly, performance representations present potential issues for hedge fund managers, including possible misrepresentations caused by improper valuation practices and fee deferrals. Both the enforcer and industry perspectives of these and other topics were explored at a recent Practising Law Institute program. Barry P. Barbash, a former Director of the SEC Division of Investment Management and now a partner at Willkie Farr & Gallagher, moderated the program, which featured Stephanie R. Breslow, a partner at Schulte Roth & Zabel; and Igor Rozenblit, co-leader of the Private Funds Unit of the SEC Office of Compliance Inspections and Examinations. This article highlights the panelists’ commentary on these matters. For more from Breslow, see our two-part series on “Gates, Side Pockets, Secondaries, Co-Investments, Redemption Suspensions, Funds of One and Fiduciary Duty”: Part One (Dec. 4, 2014); and Part Two (Dec. 11, 2014). For insight from Rozenblit, see “SEC’s Rozenblit Offers Perspectives From the Private Funds Unit” (Feb. 11, 2016); and “Operations and Priorities of the Private Funds Unit” (Sep. 24, 2015).

How Hedge Funds Can Mitigate FIN 48 Exposure in Australia and Mexico (Part Three of Three)

Exposure to withholding taxes and exposure under FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), are growing concerns for hedge funds investing in foreign securities. Australia and Mexico, along with other countries, have issued pronouncements on taxation of capital gains for non-residents. However, certain methods can be useful for funds to avoid or reduce exposure to withholding taxes. In this guest three-part series, Harold Adrion of EisnerAmper discusses hedge fund exposure to foreign withholding taxes and FIN 48. This third article explores developments in Australia and Mexico, as well as how hedge funds can minimize exposure to withholding taxes. The first article explained Fin 48 and considered E.U. developments regarding free movement of capital and its impact on funds. The second article addressed the limited exemption to capital gains taxation of non-residents announced by China and other issues for non-resident investors. For more on Australian tax issues, see “What Hedge Funds Need to Know About Tax Relief Under the New Australian Investment Manager Regime” (Jun. 11, 2015). For further insight from EisnerAmper professionals, see our two-part series on “How Can Hedge Fund Managers Structure, Negotiate and Implement Expense Caps to Amplify Capital Raising Efforts?”: Part One (Jun. 20, 2013); and Part Two (Jun. 27, 2013).

Reduced Management Fees and Narrower Liquidity Among Trends in New Hedge Funds

A recent study conducted by Seward & Kissel reveals that newly launched hedge funds are offering lower average management fees than previously recorded, while simultaneously offering more restrictive redemption terms. In its annual hedge fund study, Seward & Kissel analyzed several key findings relating to funds launched in 2015 by new U.S.-based manager clients. This article summarizes key takeaways from the study, including investment strategy trends; incentive allocations and management fees; liquidity terms; fund structures; and founder or seed capital. For HFLR coverage of previous editions of Seward & Kissel’s annual study, see: 2014 Study (Mar. 5, 2015); 2012 Study (Apr. 11, 2013); and 2011 Study (Feb. 23, 2012).

Europe Approves Hedge Fund Use of CFTC-Authorized Central Counterparties Under EMIR

The European Commission recently determined that the CFTC regime for regulating derivatives central counterparties (CCPs) is substantially equivalent to the regime established under the European Market Infrastructure Regulation (EMIR). Thus, a CFTC-authorized CCP, upon complying with certain initial margin and liquidity requirements, may clear derivatives with European counterparties without applying for E.U. authorization. As a result, hedge fund managers that use CFTC-authorized CCPs can continue using those CCPs and will not have to move to an E.U.-based CCP. Furthermore, because they will not need to comply with a second set of rules under EMIR, CFTC-authorized CCPs may be spared additional compliance costs, which costs would have likely been passed on to hedge funds in the form of higher clearing fees. This article discusses the basis for and the implications of the decision. For more on EMIR clearing obligations, see “Central Counterparty Liquidation Period May Be Shortened Under EMIR to Conform to U.S. Regime” (Sep. 10, 2015); and “Comparing and Contrasting EMIR and Dodd-Frank OTC Derivatives Reforms and Their Impact on Hedge Fund Managers” (Sep. 19, 2013). For more on EMIR generally, see “EMIR Offers Three Models of Asset Segregation to Fund Managers That Trade OTC Derivatives” (Apr. 16, 2015).

Focus on Hedge Fund Managers and Market Liquidity May Be Overemphasized, Argues FCA Director

David Lawton, Director of Markets Policy and International at the U.K. Financial Conduct Authority (FCA), has added his voice to the ongoing debate about the systemic risk posed by hedge funds and other investment funds. See “European Central Bank Official Regards Hedge Fund Leverage As Risk to Financial System” (Mar. 24, 2016). In a speech at The 9th Financial Risk International Forum in Paris, Lawton provided some background to the debate; discussed market and fund liquidity, along with regulatory work that has been undertaken by the FCA and others; and addressed investor concerns. For additional insight from Lawton, see “FCA Director Summarizes 2015 Regulatory Initiatives Applicable to Hedge Fund Managers and Financial Markets” (Jan. 7, 2016); and “FCA Urges Hedge Fund Managers to Prepare for MiFID II” (Oct. 29, 2015).

Thompson Hine Adds Corporate Partner Bibb Strench in D.C.

Bibb Lamar Strench recently joined Thompson Hine as a partner in the investment management subgroup of the firm’s corporate transactions and securities practice in Washington, D.C. Strench’s practice focuses on exchange-traded funds, closed-end funds, mutual funds and other investment companies. For insight from Strench, see “The First Steps to Take When Joining the Rush to Offer Registered Liquid Alternative Funds” (Nov. 6, 2014); and our series on conflicts arising out of simultaneous management of hedge and alternative mutual funds: Part One (Apr. 2, 2015); Part Two (Apr. 9, 2015); and Part Three (Apr. 16, 2015).

Private Funds Partner Russel Perkins Joins Dechert

Dechert has announced the arrival of Russel G. Perkins as a partner in its financial services practice group in New York City. He advises fund sponsors, asset managers and institutional investors on a wide variety of domestic and international issues relating to real estate funds, private equity funds, hedge funds, funds of funds, secondaries funds and other alternative asset classes. For insight from Dechert practitioners, see our coverage of the Dechert Global Alternative Funds Symposium: “Trends in Hedge Fund Expense Allocations, Fees, Redemptions and Gates” (May 21, 2015); “Liquid Alternative Funds and Fund Governance Trends” (Jun. 25, 2015); and “Portfolio Management and Global Trends for Private Equity and Real Estate Funds” (Jul. 2, 2015); as well as our two-part series on the evolving role of hedge fund GCs and CCOs: Part One (Dec. 10, 2015); and Part Two (Dec. 17, 2015).