Jun. 23, 2016

Capital-Raising Opportunities, Regulatory Hurdles and Cultural Challenges Faced by Hedge Fund Managers in China and the Middle East

As programs facilitating investment in China’s stock markets become more widely available to investors and asset managers in Western countries, it is critically important for hedge fund managers to be aware of the possibilities and limits of various investment strategies and to keep pace with China’s liberalization. Similarly, the Middle East presents a patchwork of jurisdictions, imposing various regulations on managers looking to raise capital. The capital-raising opportunities, regulatory hurdles and cultural challenges faced by hedge fund managers looking to access these regions were discussed as part of the Dechert Global Alternative Funds Symposium held in New York on April 6. Moderated by Dechert partner Angelyn Lim, the panel featured partners Karl Paulson Egbert and Christopher Gardner, as well as Dianna Raedle, chief executive officer and president of Deer Isle Capital. This article highlights the key takeaways from the panel discussion. For coverage of last year’s Symposium, see “Portfolio Management and Global Trends for Private Equity and Real Estate Funds” (Jul. 2, 2015); and “Trends in European and Global Hedge Fund Marketing” (May 28, 2015).

What Today’s Brexit Vote Could Mean for Hedge Fund Managers

On June 24, 2016, the world will learn the decision of U.K. citizens to stay in or leave the E.U. If the “Brexit” becomes a reality, hedge fund managers based or operating in the U.K. could face repercussions, including changing regulations and restricted access to markets for their hedge funds. Although the U.K. would remain in the E.U. for at least two years while working out the details of an exit, hedge fund managers should still take certain steps to prepare for and mitigate the impact of departure. This article analyzes the potential implications of the Brexit on hedge fund managers and steps that hedge fund managers should take to prepare. For more on the Brexit, see “With Brexit Looming and New Fund Structures Available, U.S. Hedge Fund Managers Face Risks and Opportunities for Marketing in Europe” (Jun. 9, 2016); and “European Commissioner Emphasizes Need for Proportionate Regulation to Promote the CMU” (Mar. 17, 2016).

DTSA Provides Hedge Fund Managers With Protection for Proprietary Trading Technology and Other Trade Secrets

On May 11, 2016, the Defend Trade Secrets Act (DTSA) became law. The DTSA provides a new and powerful – but complex – federal statute that hedge fund managers can rely upon to protect their trade secrets, including computer models underlying high-frequency and algorithmic trading. The statute also requires hedge fund managers to take affirmative steps in order to protect those trade secrets and obtain the full benefit of the new law. As discussed in prior articles, laws governing the protection of trade secrets and computer crimes are fueling significant interpretative debates. See “How Can Hedge Fund Managers Protect Themselves Against Trade Secret Claims?” (May 16, 2014); “Recent Developments Affecting the Protection of Trade Secrets by Hedge Fund Managers” (Oct. 25, 2013); “Protecting Hedge Funds’ Trade Secrets: What A Difference A Year Makes” (Apr. 19, 2012); and “Protecting Hedge Funds’ Trade Secrets: The Federal Government’s Enforcement of Criminal Laws Protecting Proprietary Trading Strategies” (Dec. 10, 2010). In a guest article, Sean R. O’Brien and A.J. Monaco, managing partner and associate, respectively, at O’Brien LLP, discuss how the DTSA is an extremely important step toward rectifying and clarifying some of those issues and explore questions raised by the new statute.

SEC Enforcement Action Illustrates Focus on Investment Adviser Obligation to Secure Client Information 

Morgan Stanley Smith Barney may have escaped charges under Section 5 of the Federal Trade Commission Act, but it has agreed to pay $1 million to settle charges that it violated the Safeguards Rule. The settlement stems from allegations that an employee transferred data containing personally identifiable information of 730,000 customers to his personal server. That data later appeared on multiple internet sites. There was no harm alleged, and this settlement, coupled with the R.T. Jones and Craig Scott Capital actions, may show that the SEC is picking up enforcement of the Safeguards Rule. This article, with insight from Debevoise partner Jeremy Feigelson, analyzes the settlement and its implications for hedge fund managers and other investment advisers. See also “Practical Steps That Commodity-Focused Hedge Fund Managers Can Take to Combat Cybersecurity Threats” (Mar. 10, 2016).

Undisclosed Increase in Investment Adviser’s Fees Could Result in Significant Penalties 

Fee and expense practices of private fund advisers remain in the SEC’s crosshairs. See “SEC Division Heads Enumerate OCIE Priorities, Including Cybersecurity, Fees, Bad Actors and Never-Before Examined Hedge Fund Managers (Part One of Two)” (Apr. 28, 2016). The SEC recently brought suit in Connecticut against a registered investment adviser, alleging improper transfer of client assets into new mutual funds, thereby increasing client advisory fees without changing the clients’ investment strategy. The adviser failed to disclose the alleged conflict of interest to its clients. The SEC seeks an injunction, disgorgement and civil penalties. This article summarizes the facts giving rise to the action and the SEC’s civil complaint. For more on enforcement actions involving fee disclosures and practices, see “Blackstone Settles SEC Charges Over Undisclosed Fee Practices” (Oct. 22, 2015); and “SEC Enforcement Action Involving ‘Broken Deal’ Expenses Emphasizes the Importance of Proper Allocation and Disclosure” (Jul. 9, 2015).

AIMA (Japan) and Eurekahedge Survey of Investors in Japan Reveals Concerns With Hedge Fund Manager Registration Requirements, the Volcker Rule and Success of “Abenomics”

The Alternative Investment Management Association (Japan) and Eurekahedge recently completed their third annual survey of regulatory and market factors that affect investing in Japan. Respondents’ alternative investments and overall allocation preferences were measured as well as their outlook on the Japanese economy. The survey detected growing concern with U.S. registration requirements for private fund managers, the so-called Volcker rule and other Dodd-Frank regulations. Investors also appear particularly pessimistic about the Japanese economic policies known as “Abenomics.” This article examines these and other key takeaways from the survey report. For other recent investor surveys, see “Credit Suisse Survey Reveals Growing Demand by Hedge Fund Investors for Managed Accounts, Long-Only Funds and Alternative Mutual Funds” (Apr. 7, 2016); “Ernst & Young’s 2015 Global Hedge Fund and Investor Survey Probes Hedge Fund Growth Priorities, Fee and Expense Climate, Prime Brokerage and Operational Matters” (Dec. 3, 2015); and our two-part series on the “Deutsche Bank Alternative Investment Survey”: “Potential Asset Flows, Investor Allocation Plans and Portfolio Construction Considerations” (Mar. 17, 2016); and “Fund Fees, Early Stage Investing and AIFMD” (Mar. 24, 2016).

Stephen C. Jacobs Joins Herrick as Partner and Corporate Department Co-Chair

On June 15, 2016, Herrick, Feinstein announced that Stephen C. Jacobs has joined as a partner and co-chair of the firm’s corporate department. His arrival strengthens the firm’s corporate transactional and private investment fund capabilities. For insight from Herrick partners, see “How Can Emerging Managers Raise Institutional Capital While Avoiding Regulatory Pitfalls?” (Aug. 22, 2013); and our two-part series on “How Can Hedge Fund Managers Market Their Funds Using Case Studies Without Violating the Cherry Picking Rule?”: Part One (Dec. 5, 2013); and Part Two (Dec. 12, 2013).