Dec. 8, 2016

Ernst & Young’s 2016 Global Hedge Fund and Investor Survey Examines Marketing Strategies, Talent Management, Prime Brokerage and Operational Matters (Part Two of Two)

Ernst & Young (EY) recently released the results of its tenth annual Global Hedge Fund and Investor Survey. Among other topics, the survey examined marketing strategies, operational efficiency, prime brokerage and talent management. This article, the second in a two-part series, describes the survey’s key findings in these respective areas. The first article detailed the survey’s results concerning investor allocation preferences, product customization, manager growth strategies, industry risks, pressure on management fees and trends in non-traditional products. For coverage of previous EY surveys, see “Continued Divergence of Expectations Between Managers and Investors” (Nov. 21, 2012); “Juxtaposition of the Views of Hedge Fund Managers and Investors on Hedge Fund Succession Planning, Governance, Administration, Expense Pass-Throughs and Due Diligence” (Jan. 5, 2012); and “Hedge Fund Industry Has ‘Weathered the Storm’” (Nov. 19, 2009).

How Fund Managers Can Mitigate Prime Broker Risk: Structural Considerations of Multi-Prime or Split Custodian-Broker Arrangements (Part Two of Three)

To mitigate the risks arising from potential prime broker failure or malfeasance, fund managers have looked beyond individual arrangements with brokers to broader structural changes, such as reallocating some of the risk to third parties. This can be accomplished by using multiple prime brokers (multi-prime arrangements) or by engaging a third-party custodian to hold some or, in rare instances, all assets separate from the prime broker (split custodian-broker arrangements). While each approach varies in effectiveness with respect to mitigating prime brokerage risk, there are also various factors and potential downsides for fund managers to evaluate when considering any such arrangement. This article, the second in a three-part series, outlines the various nuances of multi-prime and split custodian-broker arrangements to enable fund managers to evaluate the ability of each to mitigate the risk posed by their prime brokers. The first article in this series detailed preliminary considerations for fund managers before engaging prime brokers, including the various types of services available and the ways that managers can perform diligence on the creditworthiness of prime brokers. The third article will examine various legal protections – including with respect to sub-custodians and cross-default provisions – that can be negotiated in prime brokerage agreements to mitigate risk from the arrangement. For more on mitigating risk from prime brokers, see “In Frozen Credit Markets, Enhanced Prime Brokerage Arrangements Offer a Rare Source of Hedge Fund Leverage, but Not Without Legal Risk” (Feb. 26, 2009); and “How Can Hedge Funds Structure Their Prime Brokerage Arrangements to Protect Themselves?” (Oct. 10, 2008). 

How Fund Managers May Deploy the Cayman Islands LLC Structure

Since the introduction of the Cayman Islands Limited Liability Companies Law on July 8, 2016, over 150 Cayman Islands limited liability companies (Cayman Islands LLCs or LLCs) have been registered. See “New Cayman Islands LLC Structure Offers Flexibility to Hedge Fund Managers” (Mar. 10, 2016). In a guest article, Walkers partners Tim Buckley and Melissa Lim, along with senior counsel Andrew Barker, review: (1) some of the key features of Cayman Islands LLCs, including how they differ from their Delaware counterparts and other Cayman Islands entities; (2) how LLCs are currently being used; and (3) possible future developments with respect to LLCs. For additional insight from Lim on the Cayman Islands LLC, see “Despite Fiduciary Duty Questions, Cayman LLCs Can Offer Savings and Other Advantages to Hedge Fund Managers” (Jul. 21, 2016). For further commentary from Buckley, see “Annual Walkers Fundamentals Seminar Discusses How Managers Attract Investors in a Challenging Market by Tailoring Fund Structures and Governance Policies” (Dec. 1, 2016); and “Speakers at Walkers Fundamentals Hedge Fund Seminar Discuss Recent Trends in Hedge Fund Terms, Corporate Governance, Side Letters, FATCA and Cayman Fund Regulation” (Dec. 20, 2012).

Former General Counsel and Current Independent Director Discusses the Importance of Robust Fund Governance

William H. Woolverton recently joined the New York office of DMS Governance Ltd. (DMS) as managing director and head of U.S. legal. In this role, Woolverton has oversight of U.S. legal for DMS, along with senior responsibilities relating to DMS’ U.S. business, and serves as an independent director on the boards of investment funds and related structures. The Hedge Fund Law Report recently interviewed Woolverton in connection with his move to DMS, during which he discussed the role of robust fund governance in the context of private funds. For additional insight from Woolverton, see “ALM General Counsel Summit Reveals How Hedge Fund Managers Can Adopt a Robust Compliance Program and Address FCPA Risks” (Dec. 3, 2015); “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 “Fifth Annual Hedge Fund General Counsel Summit Covers Insider Trading, Expert Networks, Whistleblowers, Exit Interviews, Due Diligence, Examinations, Pay to Play and More” (Sep. 22, 2011). For commentary from DMS’ founder, see “Don Seymour Discusses Hedge Fund Governance and the Impact of the SEC-CIMA Cooperation Arrangement on Hedge Fund Manager Examinations” (Apr. 5, 2012).

SEC Settlement With PIMCO Highlights the Importance of Proper Valuation and Performance Disclosures

Valuation and performance claims are perennial SEC enforcement priorities. See “SEC Division Heads Enumerate Enforcement Priorities, Including Conflicts of Interest, Valuation, Performance Advertising and CCO Liability (Part Two of Two)” (May 5, 2016). Pacific Investment Management Company LLC (PIMCO) recently agreed to pay over $19.8 million in disgorgement, interest and penalties to settle SEC charges that it overvalued the securities in its exchange-traded fund (ETF). Although the action involved an ETF, it provides a timely reminder to all fund managers of the obligation to value assets accurately, to disclose their funds performance correctly and to implement appropriate policies and procedures for these purposes. This article summarizes the alleged conduct that gave rise to the enforcement proceeding and the other terms of the settlement order. For other actions involving inaccurate valuations and internal controls failures, see “GLG Partners Settlement Illustrates SEC Views Regarding Valuation Controls at Hedge Fund Managers” (Jan. 16, 2014); and “SEC’s Recent Settlement With a Hedge Fund Manager Highlights the Importance of Documented Internal Controls When Managing Conflicts of Interest Associated With Asset Valuation and Cross Trades” (Jan. 9, 2014).

Sadis & Goldberg Seminar Highlights the Ample Fundraising and Co-Investment Opportunities in the Private Equity Industry, Along With Attendant Deal Flow and Fee Structure Issues 

Private equity funds are currently in the midst of a boom period, with a surplus of investor assets at their disposal. However, several factors – including a scarcity of deal flow and an increased demand by investors for decreased and customized fees – function as counterweights to this positive development in the industry. Additionally, while investors are increasingly interested in obtaining co-investment rights, private equity fund managers are forced to navigate risks of inequitable treatment that could flow from those arrangements. See “Co-Investments Enable Hedge Fund Managers to Pursue Illiquid Opportunities While Avoiding Style Drift (Part One of Three)” (Feb. 21, 2014). The role of these incongruent interests and how private equity fund managers can balance them were discussed during a segment at Sadis & Goldberg’s 9th Annual Alternative Investment Management Seminar. The segment, entitled “Private Equity Ascending: Economic and Legal Developments,” featured Sadis & Goldberg partners Steven Huttler and Yehuda Braunstein. This article presents key takeaways from the discussion. For further insight from Huttler, see “Stigma Fades As Use of Gates Becomes More Common” (Dec. 24, 2008); and “Gates Provide Safety Valves for Hedge Funds and Investors” (Apr. 15, 2008). For additional commentary from Braunstein, see “Understanding the Benefits and Uses of Series LLCs for Hedge Fund Managers” (Nov. 15, 2012).

Alston & Bird Announces Arrival of New Financial Services Partner in New York

Michael Saarinen has joined Alston & Bird as a partner in the investment management, trading and markets practice of the firm’s financial services and products group. Saarinen advises private fund sponsors of varying sizes and profiles on the formation, operation and marketing of hedge funds, private equity funds, venture capital funds, growth equity funds and bespoke hybrid products. For additional insight from Alston & Bird attorneys, see “How Can Hedge Fund Managers Use Advisory Committees to Manage Conflicts of Interest and Mitigate Operational Risks?”: Part One (Apr. 11, 2013); and Part Two (Apr. 25, 2013); and our three-part series on identifying, preventing, detecting, handling and correction of trade errors: Part One (Mar. 7, 2013); Part Two (Mar. 14, 2013); and Part Three (Mar. 21, 2013).