Sep. 22, 2016

AIMA Survey Identifies Key Ways That Managers Align With Investors, Including Alternative Fee Structures, Skin in the Game and Customized Investment Solutions

The Alternative Investment Management Association (AIMA) recently released a paper reviewing the nature of relationships between hedge fund managers and their investors. AIMA’s report explores a number of methods that managers are using to strengthen their relationships with investors, including by employing alternative fee structures, investing significant capital in their funds and offering customized investment solutions. This article examines these and other key takeaways from the report. For additional insight from AIMA, see “Basel III Raises Prime Brokerage Costs for Hedge Fund Managers” (Feb. 18, 2016); “Structures and Characteristics of Activist Alternative Investment Funds” (Mar. 12, 2015); and “Key Drivers of the Bifurcation of the Hedge Fund Industry Between Larger and Smaller Managers” (May 24, 2012).

SEC Settlements Highlight Need for Managers to Verify Performance Claims of Others Prior to Use

In February 2016, the SEC settled claims that investment adviser Cantella & Co. improperly relied on and disseminated materially misleading marketing materials prepared by F-Squared Investments, Inc. (F-Squared) for its so-called “AlphaSector” strategies. See “Hedge Fund Managers May Be Liable for Performance Claims of Others” (Mar. 3, 2016). The fallout from F-Squared’s improper use of backtesting in those marketing materials continues to spread to others who used its services. The SEC recently settled 13 additional enforcement proceedings against advisers who allegedly disseminated some or all of F-Squared’s erroneous claims without attempting to confirm their veracity. This article summarizes the allegations contained in the settlement orders, along with the terms of each settlement. For more on performance advertising, see “Liquidity and Performance Representations Present Potential Pitfalls for Hedge Fund Managers” (Mar. 31, 2016); and our two-part series entitled “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). For other performance advertising issues, see our articles on GIPS compliance claims; testimonials and social media; the use of gross performance results; and the use of other firms’ track records.

Seward & Kissel Private Funds Forum Explores How Managers Can Mitigate Improper Dissemination of Sensitive Information (Part One of Two)

In the current heightened regulatory environment, the SEC has focused on safeguards that managers employ to prevent the dissemination of sensitive information and to ensure it is not used for improper trading. This was among the critical issues addressed by one of the panels at the second annual Private Funds Forum produced by Seward & Kissel and Bloomberg BNA, held on September 15, 2016. Moderated by Seward & Kissel partner Patricia Poglinco, the panel included Rita Glavin and Joseph Morrissey, partners at Seward & Kissel; Laura Roche, chief operating officer and chief financial officer at Roystone Capital Management; and Scott Sherman, general counsel at Tiger Management. This article, the first in a two-part series, reviews the panel’s discussion about risks associated with the inflow and outflow of material nonpublic information, as well as steps that fund managers can take to prevent its improper use. The second article will discuss the types of conflicts of interest targeted by the SEC, the current progress of the SEC’s whistleblower program and the difficulty of prosecuting insider trading. For coverage of the 2015 Seward & Kissel Private Funds Forum, see “Trends in Hedge Fund Seeding Arrangements and Fee Structures” (Jul. 23, 2015); and “Key Trends in Fund Structures” (Jul. 30, 2015). For additional commentary from Glavin, see “FCPA Compliance Strategies for Hedge Fund and Private Equity Fund Managers” (Jun. 13, 2014). For more from Sherman, see “RCA Asset Manager Panel Offers Insights on Hedge Fund Due Diligence” (Apr. 2, 2015).

What U.S. and Other Non-Swiss Portfolio Managers Need to Know About Managing Assets of Swiss Occupational Benefit Plans

Swiss occupational benefit plans – a pillar of the Swiss social security system – are increasingly outsourcing portfolio management responsibilities to investment professionals, including “foreign” (i.e., non-Swiss) managers, in response to the growing complexity of investment management. In a guest article, Stephanie Comtesse, counsel at Bär & Karrer, provides an overview of Swiss occupational benefit plans; how management of these plans by foreign service providers fits within existing and proposed Swiss legislation; and additional legal considerations caused by the outsourcing of these responsibilities. For coverage of additional Swiss regulations, see “New Swiss Regulations Require Appointment of Local Agents and Increased Disclosure in Hedge Fund Documents” (May 14, 2015); “Swiss Hedge Fund Marketing Regulations, BEA Forms and Form ADV Updates” (Mar. 5, 2015); and “The Changing Face of Alternative Asset Management in Switzerland” (Feb. 2, 2012). For analysis of similar outsourcing by U.S. pension plans, see our three-part series entitled “Understanding U.S. Public Pension Plan Delegation of Investment Decision-Making to Internal and External Investment Managers”: Part One (Jan. 23, 2014); Part Two (Feb. 6, 2014); and Part Three (Feb. 21, 2014).

Hedge Funds As Shadow Banks: Tax Considerations for Hedge Funds Pursuing Direct Lending Strategies (Part One of Three)

Since the 2008 financial crisis, a tangle of regulations has forced banks to step back from providing credit to companies and individuals. Recognizing a market opportunity, other financial intermediaries – including hedge and private equity funds – have stepped in to fill this void. These new lenders are often referred to as “shadow banks” because, although they are not regulated like banks, they perform bank-like activities such as making loans to companies. As asset managers continuously search for yield, the investment strategy of direct lending – generally characterized as “non-bank finance” – has risen in popularity, with alternative lenders typically charging higher interest rates than traditional lenders. However, engaging in these direct lending practices can pose a number of challenges from a tax perspective, particularly for non-U.S. investors, that impact hedge fund managers undertaking these efforts. This article, the first in a three-part series, discusses the prevalence of hedge fund lending to U.S. companies and the primary tax considerations for hedge fund investors associated with direct lending. The second article will explore structures available to hedge fund managers to mitigate the tax consequences of pursuing a direct lending strategy. The third article will provide an overview of the regulatory environment surrounding direct lending and a discussion of the common terms applicable to direct lending funds. For additional insight on the prevalence of direct lending in the hedge fund industry, see “Dechert Panel Discusses Recent Hedge Fund Fee and Liquidity Terms, the Growth of Direct Lending and Demands of Institutional Investors” (Jul. 14, 2016).

Steps Hedge Fund Managers Can Take in Light of NY Attorney General’s View That Certain Non-Compete Clauses Are Unconscionable 

In a move that caught many by surprise, the New York Attorney General recently announced that it had settled investigations with two companies regarding their use of non-compete provisions in employment agreements. While neither of these settlements was with an investment management firm, the broad and unfavorable statements made by the New York Attorney General concerning non-competes should not be ignored by hedge fund managers. To understand the impact of these settlements on alternative asset managers, along with what, if any, steps managers should take to protect themselves from similar enforcement actions, the Hedge Fund Law Report interviewed Richard J. Rabin, partner at Akin Gump and head of the firm’s New York labor and employment group. For additional insight from Rabin, see “What the NLRB Complaint Against Bridgewater Means for Hedge Fund Manager Employment Agreements” (Sep. 8, 2016). For a broader discussion on restrictive covenants in employment agreements, see “Non-Competition and Non-Solicitation Provisions and Other Restrictive Covenants in Hedge Fund Manager Employment Agreements” (Nov. 23, 2011).

Peter Naismith Joins Schulte Roth & Zabel’s Investment Management Practice

Schulte Roth & Zabel has expanded its investment management practice in New York with the hiring of special counsel Peter Naismith, an attorney with broad expertise in the areas of fund structuring and formation. For insight from other Schulte attorneys, see “Implications of Lehman Brothers Decision on Hedge Fund Managers Trading CDOs” (Jul. 28, 2016); “Liquidity and Performance Representations Present Potential Pitfalls for Hedge Fund Managers” (Mar. 31, 2016); and “Schulte Partner Stephanie Breslow Discusses Tools for Managing Hedge Fund Crises Caused by Liquidity Problems, Poor Performance or Regulatory Issues” (Jan. 9, 2014).

Winston & Strawn Adds Finance Partner in New York

Winston & Strawn has lured finance and corporate attorney Lynn Tanner to its New York office. Tanner, who joins the firm as a partner, advises lenders such as hedge funds, banks, mezzanine funds, business development companies (BDCs) and specialty finance companies on syndicated and club financings, domestic and international acquisition financings, recapitalizations, bridge loans, working capital facilities, high-yield offerings, restructurings and workouts. For commentary from other Winston & Strawn partners, see “Permanent Capital Structures Offer Managers Funding Stability and Access to Capital While Granting Investors Liquidity and Access to Managers” (Apr. 9, 2015); and “Primary Legal and Business Considerations in Structuring Hedge Fund Capacity Rights” (Jun. 3, 2010).