Aug. 4, 2016

Despite Significant Redemptions, Credit Suisse Survey Finds Investors Remain Committed to Hedge Funds

Credit Suisse Capital Services (CS) recently issued its “Mid-Year Survey of Hedge Fund Investor Sentiment” (Mid-Year Survey) – a follow-up to CS’s annual global hedge fund investor survey (2016 Annual Survey). See “Credit Suisse Survey Reveals Growing Demand by Hedge Fund Investors for Managed Accounts, Long-Only Funds and Alternative Mutual Funds” (Apr. 7, 2016). The Mid-Year Survey focuses on hedge fund investor redemptions and reallocations in the first half of 2016, future allocation plans and strategy preferences. Among the survey findings, CS found a slight decrease in redemptions from the 2016 Annual Survey, a wide distribution in the driving factors behind investor redemptions and a substantial disparity in the types of investment strategies preferred among investors based on their geographic location. CS also found that investors remain committed to hedge funds, with the majority intending to redeploy redemption proceeds. This article summarizes the key findings of the Mid-Year Survey. For coverage of previous CS investor surveys, see “Investor Appetite for Alternative Investment Vehicles and Strategy Preferences” (Aug. 27, 2015); “Factors in Institutional Investors’ Investment and Redemption Decisions, Appetite for Alternative UCITS and Anticipated 2015 Hedge Fund Investments by Strategy and Region” (Mar. 27, 2015); and “Allocation Preferences of Hedge Fund Investors, With Particular Attention on Preferences of Pension Funds and Insurance Companies” (Mar. 14, 2013).

Best Practices for Hedge Fund Managers to Adopt in Anticipation of Enactment of FinCEN AML Rule Proposal

After more than a decade in the works, the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of Treasury, released proposed rules in August 2015 that will subject registered investment advisers to anti-money laundering (AML) regulation once adopted. See our two-part series on how hedge fund managers can respond to the AML rules proposed by FinCEN: “Establish an AML Program” (Nov. 5, 2015); and “Operate an AML Program” (Nov. 12, 2015). Cadwalader, Wickersham & Taft recently presented a program examining the current AML regime, the requirements of the proposed rules and how those changes will affect hedge fund managers. The program featured Maureen Dollinger, a vice president of financial crime legal at Barclays; Adam Gehrie, general counsel and chief compliance officer (CCO) of Gresham Investment Management; and Cadwalader partners Dorothy Mehta and Joseph Moreno. This article highlights the portions of the panel’s discussion most relevant to hedge fund managers and other investment advisers. For further insight from Mehta, see our two-part series on SEC remote examinations: “What to Expect” (May 12, 2016); and “How to Prepare” (May 19, 2016); as well as “Practical Guidance for Hedge Fund Managers on Preparing For and Handling NFA Audits” (Oct. 17, 2014).

ESMA Limits Positive Recommendation for AIFMD Passport Extension to Only Five Non-E.U. Countries; Excludes U.S., Citing Uneven Playing Field (Part One of Two)

E.U. alternative investment fund managers (AIFMs) are able to market their alternative investment funds (AIFs) to citizens in all E.U. member states under the Alternative Investment Fund Managers Directive (AIFMD). The European Securities and Markets Authority (ESMA) was tasked with providing advice on the viability of extending an AIFMD marketing passport to non-E.U. AIFMs and AIFs. In its initial advice in 2015, ESMA issued positive recommendations for several countries but ultimately advocated for delaying a decision on extending the marketing passport. See “ESMA Opinion Highlights Issues Regarding the Functioning of the AIFMD Passport” (Aug. 13, 2015); and “ESMA Recommends Extension of the AIFMD Passport for Hedge Fund Managers and Funds in Certain Non-E.U. Jurisdictions” (Aug. 6, 2015). In its latest advice issued on July 18, 2016, ESMA provided positive recommendations for extending the AIFMD passport to five countries, but identified significant obstacles to the candidacies of seven other countries, including the U.S. However, as in its 2015 advice, ESMA recommended that the AIFMD passport not be extended until ESMA has identified a “sufficient number” of acceptable candidates. This article, the first in a two-part series, summarizes the criteria ESMA used to evaluate the candidates and details the obstacles it identified for the seven jurisdictions to which it did not recommend extending the passport. The second article will provide industry commentary on issues that likely factored into ESMA’s advice and discuss the potential implications of the advice on hedge fund managers. See also “Marketing Strategies for U.S. Hedge Fund Managers under AIFMD (Part One of Two)” (Jul. 21, 2016); “Leading Law Firms Discuss Hedge Fund Marketing and Distribution Opportunities in a Post-Brexit World (Part Two of Two)” (July 14, 2016); and “European Commissioner Addresses Disproportionate Regulation, Difficulties of Hedge Funds to Rely on AIFMD Passport and Increased Compliance Burden” (May 5, 2016).

Recent Legislative and Judicial Developments Fail to Diminish Appeal of Stockholder Appraisal Actions As Strategy for Hedge Fund Managers

The Delaware stockholder appraisal action (a statutory cause of action) has become an increasingly common method for hedge fund managers to generate investment returns. In appraisal actions, managers hold shares in a corporation and dissent from a proposed merger or consolidation, using litigation to significantly increase the value of those shares. Following pressure from the defense bar, it was believed that the Delaware legislature and courts were eager to rein in stockholders’ appraisal rights. But the enactment of Delaware Bill No. 371 (HB 371) and the Court of Chancery’s recent decision in In re Appraisal of Dell, Inc. (In re Dell) indicate that the right to appraisal is alive and well, confirming that this litigation-based investment strategy remains a suitable option for hedge fund managers. In a guest article following their earlier piece discussing the viability of the appraisal rights strategy for hedge fund managers, Ben Quarmby, a partner at MoloLamken, and Hassan A. Shah, a senior associate at Rock Creek Partners, analyze the changes introduced by HB 371 and In re Dell, along with the likely impact of those changes on shareholder appraisals. For additional insight from Quarmby, see “Measures Hedge Fund Managers Can Implement to Maximize Protection of Their Trade Secrets” (Dec. 6, 2012). For commentary from other MoloLamken practitioners, see “The SEC’s Pay to Play Rule Is Here to Stay: Tips for Hedge Fund Managers to Avoid Liability” (Oct. 8, 2015); “FCPA Considerations for the Private Fund Industry: An Interview with Former Federal Prosecutor Justin Shur” (May 23, 2014); and “How Private Fund Managers Can Manage FCPA Risks When Investing in Emerging Markets” (Jan. 10, 2013).

How Emerging Hedge Fund Managers Can Raise Capital in a Challenging Market Without Overstepping Legal Bounds

Fund managers struggling to raise capital in a hedge fund sector plagued by an outflow of money may seek to employ creative methods to build a fundraising edge. As they do so, it is critically important for managers to be attentive to the nuances of SEC definitions, rules and regulations so as to avoid incurring large civil penalties and settlements. See “Marketing and Reporting Considerations for Emerging Hedge Fund Managers” (Jun. 16, 2016); and “How Can Emerging Managers Raise Institutional Capital While Avoiding Regulatory Pitfalls?” (Aug. 22, 2013). These issues were the focus of a panel discussion that took place during the Ninth Annual Advanced Topics in Hedge Fund Practices: Manager and Investor Perspectives conference presented by Morgan, Lewis & Bockius on June 9, 2016. The panelists were Morgan Lewis partners Stephen C. Tirrell, Steven M. Giordano and Ethan W. Johnson. This article summarizes the takeaways from the discussion. For coverage of other panels at the conference, see “Growing SEC Enforcement of Hedge Fund Managers Requires Greater Focus on Cybersecurity and Financial Disclosure” (Jul. 7, 2016); and “How Can Private Fund Managers Grant Preferential Rights? Delaware Chancery Court Decision Stresses Need for Fund Document Integration” (Jun. 30, 2016). For additional insight from Morgan Lewis partners, see our two-part series on Singapore-based hedge fund managers: “How to Structure” (Jul. 16, 2015); and “Licensing and International Regulation” (Jul. 23, 2015); as well as “Key Person Provisions in Hedge Fund Documents: Structure, Consequences and Demand From Institutional Investors” (Sep. 17, 2009).

A “Clear” Guide to Swaps and to Avoiding Collateral Damage in the World of ERISA and Employee Benefit Plans (Part Two of Four)

This is the second article in our four-part serialization of a treatise chapter by Steven W. Rabitz, partner at Stroock & Stroock & Lavan, and Andrew L. Oringer, partner at Dechert. The chapter describes – in considerable detail and with extensive references to relevant authority – the many substantive considerations associated with employing swap transactions for employee benefit plans, certain other similar plans and “plan assets” entities subject to the fiduciary provisions of the Employee Retirement Income Security Act of 1974 (ERISA) or the corresponding provisions of Section 4975 of the Internal Revenue Code of 1986 (Code), as well as potential penalties for missteps. This article discusses exemptions that could keep swaps from being considered prohibited transactions and explores the extent to which swap counterparties and others would be considered fiduciaries under ERISA, as well as the potential implications of that consideration. To read the first article in this serialization, click here

Fried Frank Bolsters Tax Department in New York

Fried Frank has added a tax partner in its New York office. Daniel Paulos advises clients on the formation and operation of hedge funds and private equity funds, as well as on qualifying income issues affecting publicly traded partnerships. See “What Effect Will the Carried Interest Provision in the Tax Extenders Act Have on Hedge Fund Managers That Are or May Become Publicly Traded Partnerships?” (Jan. 27, 2010). For analysis of recent commentary by Fried Frank partners, see our two-part series on AIFMD: “Marketing Strategies for U.S. Hedge Fund Managers” (Jul. 21, 2016); and “Navigating Dual AIFMD and CFTC Compliance” (Jul. 28, 2016); as well as “Application to Hedge Fund Managers of the Internal Control Report Requirement of the Amended Custody Rule” (Feb. 11, 2010).