Jun. 9, 2016

Financing Facilities Offer Hedge Funds and Managers Greater Flexibility (Part Two of Three)

Along with subscription credit facilities, other forms of fund financing are becoming more prevalent in the asset management industry. In the hedge fund space, fund-of-funds managers are employing financing structures, and portfolio acquisition facilities and general partner support facilities are growing in use. However, along with increasing popularity, these structures have also experienced a surge in complexity. In a recent interview with the Hedge Fund Law Report, Zac Barnett and Liz Soutter, partners at Mayer Brown, discussed subscription financing facilities and other debt facilities used by funds. In this second article in a three-part series, Barnett and Soutter discuss financing facilities employed by hedge funds and other private funds, their evolution in the current market and the costs of these facilities. The first article examined subscription facilities, including their prevalence in the asset management industry, investor response to these structures and primary considerations for managers anticipating entering into such a facility. The third article will outline market, structuring and operational considerations for managers when establishing financing facilities. For more on hedge fund financing, see “Barclays Predicts Increased Financing Costs for Hedge Funds Due to Regulatory Changes Affecting Prime Broker Financing” (Oct. 18, 2012).

Practical Issues Faced by U.S.-Based Managers When Establishing U.K.-Listed Funds (Part One of Two)

U.K.-listed closed-end funds have become an increasingly popular source of permanent capital for the global asset management industry. Used for all manner of investment strategies, these vehicles are ideally suited for illiquid strategies such as private equity, and have also been used as feeder funds into single-manager hedge funds. Over the past several years, U.S.-based managers have been coming to London for the relatively greater regulatory flexibility offered by the U.K.-listed funds markets as compared to U.S. public securities markets. In a two-part guest series, Tim West and Dinesh Banani, partners at Herbert Smith Freehills, provide a practical overview of key issues facing U.S.-based managers considering establishing a fund listed in the U.K. This first article explores listing and eligibility requirements for popular U.K. listing venues; continuing obligations for U.K.-listed funds; structuring and jurisdictional considerations; and marketing under the Alternative Investment Fund Managers Directive. The second article will consider the impact of certain U.S. securities laws that would apply to the U.K. listing of the shares of a closed-end fund offered by a U.S.-based manager. See also “Regulatory and Practitioner Perspectives on Alternative Mutual Fund Compliance Risk” (Feb. 26, 2015).

With Brexit Looming and New Fund Structures Available, U.S. Hedge Fund Managers Face Risks and Opportunities for Marketing in Europe

The possibility of Britain’s electorate voting in a widely heralded June 23 referendum to leave the European Union – an eventuality popularly known as the “Brexit” – and the creation of the Luxembourg Reserved Alternative Investment Fund pose special challenges and opportunities for U.S. hedge fund managers marketing their products in the U.K. and Europe. One session of the Dechert Global Alternative Funds Symposium, held in New York on April 6, provided practical insight to help hedge fund managers understand, adapt to and take advantage of these changes and opportunities, including with respect to the marketing passport under the Alternative Investment Fund Managers Directive and the growing popularity of loan origination funds in Europe. Moderated by Boston-based Dechert partner Adrienne Baker, the panel featured London-based partners Richard Heffner and Stuart Martin; Luxembourg-based partner Antonios Nezeritis; and Munich-based partner Hans Stamm. For coverage of last year’s Symposium, see “Trends in Hedge Fund Expense Allocations, Fees, Redemptions and Gates” (May 21, 2015); and “Liquid Alternative Funds and Fund Governance Trends” (Jun. 25, 2015).

Hedge Fund Managers Must Ensure That Insider Trading Compliance Policies and Procedures Cover Third-Party Consultants

The Investment Advisers Act of 1940 requires advisers to have written policies and procedures to prevent the misuse of material nonpublic information (MNPI) by the adviser and its associated persons. A recent SEC settlement order clarifies that an investment adviser must ensure that its policies and procedures extend to reach third-party consultants. Unbeknownst to the investment adviser in this case and its compliance department, an outside consultant that provided investment research and recommendations on biotech companies to the adviser’s portfolio managers also served as a director of some of those very companies. This article summarizes the facts that led up to the SEC’s allegations, alleged violations by the investment adviser and the settlement. For discussion of an SEC enforcement action involving the misuse of MNPI by an investment consultant, see “SEC Action Demonstrates the Potential Risks of Insider Trading by Investment Consultants Hired by Private Fund Managers” (Mar. 29, 2012). For other SEC actions involving failure to adopt appropriate policies and procedures, see “Steps All Investment Advisers – and Their Compliance Officers – Should Take in Light of the SEC’s Risk Alert on Outsourced CCOs (Part Two of Two)” (Mar. 10, 2016). 

SEC Staff Discuss “General Solicitation” and Other Regulation D Issues

Many hedge fund managers raise capital from investors in private offerings conducted under Regulation D. At its public meeting held on May 18, 2016, the SEC Advisory Committee on Small and Emerging Companies addressed a number of issues regarding the JOBS Act changes to the private offering rules under Regulation D of the Securities Act of 1933, with emphasis on what constitutes “general solicitation”; verification of accredited investor status; the impact of those changes on angel investing; and enforcement of the revised rules. The session featured input from David Fredrickson, Chief Counsel and Associate Director of the SEC Division of Corporation Finance; Sebastian Gomez Abero, of that Division’s Office of Small Business Policy; and Margaret Cain, a microcap specialist in the Office of Market Intelligence of the SEC Division of Enforcement. This article presents the takeaways from the session most valuable to hedge fund managers relying on Regulation D to raise capital. For additional coverage of the SEC’s public meeting, see “SEC Commissioners and Staff Discuss Possible Amendments to Definition of Accredited Investor” (Jun. 2, 2016). For more on general solicitations under Regulation D, see “What Hedge Fund Managers Need to Know About Recent SEC Guidance on Substantive, Pre-Existing Relationships and Internet Use” (Oct. 15, 2015); and “SEC JOBS Act Rulemaking Creates Opportunities and Potential Burdens for Hedge Funds Contemplating General Solicitation and Advertising” (Jul. 18, 2013).

ESMA Executive Director Analyzes Evolving Role and Regulatory Environment for Hedge Fund Managers in Europe

The role of asset managers in Europe and the status of funds under E.U. regulations are changing markedly as funds move into a breach left by the retreat of banks from lending in the years since the global financial meltdown. Regulators, along with much of the public, have moved past a perception of lending by non-bank entities as merely a form of “shadow banking” activity. See “Irish Central Bank Issues Proposed Rules to Enable Private Funds to Originate Loans” (Sep. 11, 2014). Passporting rights have also expanded significantly, although a lack of harmony among different countries’ regulatory regimes remains a persistent problem. These issues were the focus of a talk delivered by Verena Ross, Executive Director of the European Securities and Markets Authority (ESMA), at the recent AIMA Global Policy and Regulatory Forum in London. This article spotlights the portions of Ross’ speech most relevant to hedge fund managers operating in Europe. For insight from Ross’ colleague, ESMA Chair Steven Maijoor, see “ESMA Chair Calls for Increased Transparency and Regulatory Convergence As Interest Rates Rise” (Jan. 28, 2016); and “ESMA Chair Highlights Upcoming Focus on Supervisory Convergence” (Oct. 1, 2015).

Hermes Investment Management Appoints Strategic Compliance Director

Hermes Investment Management, the £24.1 billion manager, has appointed Gill Clarke as strategic compliance director. Based in London, Clarke will lead the compliance team, with responsibility for functional expertise, compliance monitoring and advisory. She will be responsible for the development and implementation of a strategic compliance plan to establish and maintain an operational platform for the future growth of the business. See “SEC Chief of Staff Shares Fifteen-Step Plan for Adjusting to Compliance Responsibilities” (May 26, 2016).

Cambridge Associates Expands Pensions Practice With Hire of Senior Private Investments Specialist

Global institutional investment adviser Cambridge Associates has hired Vicky Williams as senior investment director. Williams will advise the firm’s U.K. and European corporate and public pension scheme clients – which range in size from £100 million to more than £20 billion in assets – on their private investment portfolios. See “Practical Consequences of the Use of Benchmarks to Measure Hedge Fund Performance by Pension Funds and Institutional Investors (Part Two of Two)” (Aug. 6, 2015); “State Pension Fund Study Challenges Assumptions Regarding Active Management and Alternative Investments” (Aug. 6, 2015); “Pension Plan Gatekeepers Increasingly Serving as Competitors to Alternative Investment Managers” (Jun. 13, 2014); and “Understanding U.S. Public Pension Plan Delegation of Investment Decision-Making to Internal and External Investment Managers (Part Three of Three)” (Feb. 21, 2014).