The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

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By Topic: Separate Accounts

  • From Vol. 9 No.43 (Nov. 3, 2016)

    The SEC’s Recent Revisions to Form ADV and the Recordkeeping Rule: What Investment Advisers Need to Know About Managed Account Disclosure, Umbrella Registration and Outsourced CCOs (Part One of Two)

    On August 25, 2016, the SEC adopted amendments to Form ADV, Part 1A, and to Rule 204-2 under the Investment Advisers Act of 1940 (Advisers Act), the so-called “recordkeeping rule.” The amendments were previously proposed on May 20, 2015. See “A Roadmap to the SEC’s Proposed Changes to Form ADV” (Jun. 4, 2015). The amendments to Form ADV provide several points of clarification and elicit new or additional information from investment advisers, while the amendments to Rule 204-2 impose additional recordkeeping requirements on investment advisers with respect to communications that contain performance claims. These changes are designed to better protect clients and investors from fraudulent or otherwise misleading performance information. In a two-part guest series, Michael F. Mavrides and Anthony M. Drenzek, partner and special regulatory counsel, respectively, from Proskauer Rose discuss the practical implications of the amendments and highlight important steps legal and compliance personnel can take to ensure they are prepared in advance of the compliance date. This first article discusses the detailed disclosures that advisers will be required to provide with respect to managed account clients and the firm’s chief compliance officer, as well as factors a registrant should consider with respect to pursuing an umbrella registration. The second article will address the new disclosure requirements relating to an adviser’s use of social media; office locations; the amount of an adviser’s proprietary assets and assets under management; the sale of interests in 3(c)(1) funds to qualified clients; and the recordkeeping requirements regarding performance claims in communications that are distributed to any person. For additional insight from Mavrides, see “Key Legal and Operational Considerations in Connection With Preparing, Filing and Updating Form PF (Part Two of Three)” (Nov. 10, 2011); as well as our two part-series on remote examinations: Part One (May 12, 2016); and Part Two (May 19, 2016). For more on Form ADV, see “When and How Can Hedge Fund Managers Permissibly Disguise the Identities of Their Hedge Funds in Form ADV and Form PF?” (Dec. 1, 2012); and “ALJ Decision Against Investment Adviser Who Received Undisclosed Compensation From a Hedge Fund Manager It Recommended to Clients Highlights SEC Scrutiny of Forms ADV” (May 3, 2012).

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  • From Vol. 7 No.15 (Apr. 18, 2014)

    Best Practices for Hedge Fund Separate Account Risk Management

    The Asset Management Group of the Securities Industry and Financial Markets Association (whose members include hedge funds and private equity funds) recently asked its members and other notable asset managers to respond to a survey about separate accounts that they manage.  Among other things, the survey asked respondents to detail their risk management processes and the nature of their approaches toward monitoring counterparty and other risks for separate accounts.  The survey report provides detail on how the surveyed firms monitor counterparty risk for separate accounts; risk metrics typically measured and monitored on an ongoing basis in the course of management of separate accounts by the surveyed firms; and risk management processes (other than counterparty risk management) the surveyed firms typically employ in the management of separate accounts.  This article describes the survey process and the survey findings, focusing in particular on the findings related to risk management for separate accounts.  The survey findings are relevant to hedge fund managers that manage separate accounts in crafting or refining their risk management systems with respect to such accounts.  See also “BNY Mellon Study Identifies Best Risk Management Practices for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 5, No. 37 (Sep. 27, 2012).

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  • From Vol. 2 No.52 (Dec. 30, 2009)

    Why Are Most Hedge Fund Investors Reluctant to Sue Hedge Fund Managers, and What Are the Goals of Investors that Do Sue Managers? An Interview with Jason Papastavrou, Founder and Chief Investment Officer of Aris Capital Management, and Apostolos Peristeris, COO, CCO and GC of Aris

    An article in last week’s issue of The Hedge Fund Law Report detailed a ruling by the New York State Supreme Court permitting a lawsuit by funds managed by Aris Capital Management (Aris) to proceed against hedge funds in which the Aris funds had invested and the managers of those investee funds.  See “New York Supreme Court Rules that Aris Multi-Strategy Funds’ Suit against Hedge Funds for Fraud May Proceed, but Negligence Claims are Preempted under Martin Act,” The Hedge Fund Law Report, Vol. 2, No. 51 (Dec. 23, 2009).  That lawsuit is one of various suits brought by Aris and its managed funds against hedge funds or managers in which the Aris funds have invested.  The Aris suits allege a variety of claims in a variety of circumstances, but collectively are noteworthy for their mere existence.  In the hedge fund world, there has been a conspicuous absence during the past two years of legal actions by hedge fund investors against hedge fund managers, despite the coming-to-fruition of circumstances that industry participants thought, pre-credit crisis, would augur an uptick in litigation: the imposition of gates, suspensions of redemptions, mispricing of securities, large losses, etc.  Jason Papastavrou, Founder and Chief Investment Officer of Aris, appears to have broken ranks with what seems like an unspoken agreement in the hedge fund world to avoid the courthouse steps, and he has done so with a considerable degree of thoughtfulness, for specific reasons and with particularized goals.  In an interview with The Hedge Fund Law Report, Papastavrou and Apostolos Peristeris, COO, CCO and GC of Aris, discuss certain of their lawsuits, why they brought them, what they seek to gain from them and what the relevant managers might have done differently to have avoided the suits.  They also discuss: seven explanations for the reluctance on the part of most hedge fund investors to sue managers; the fund of funds redemption process; how their lawsuits have affected their due diligence process; in-house administration; background checks; the importance of face-to-face meetings; side letters; how Aris investors have reacted to the lawsuits; and Aris’ transition to a managed accounts model from a fund of funds model.

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  • From Vol. 2 No.39 (Oct. 1, 2009)

    Structuring Managed Accounts Key Focus of GlobeOp’s “Managed Accounts Insights for Investors” Event

    With the events of 2008 and early 2009 – faltering hedge fund performance, high profile frauds and prime broker and counterparty failures – hedge fund investors are showing increased interest in managed accounts.  Managed accounts generally are investment portfolios owned by the investor and managed by the hedge fund manager side by side with a primary hedge fund.  They can offer an efficient vehicle for investors looking to segregate their assets from the assets of a primary fund and to avoid the various problems (many having to do with the timing of redemptions) that can affect investors in a commingled vehicle.  See, e.g., “Investors in Hedge Fund Strategies Increasingly Demanding Separate Accounts to Avoid Gates and Other Consequences of Commingled Investment Vehicles,” The Hedge Fund Law Report, Vol. 2, No. 8 (Feb. 26, 2009); “Hedge Fund Managers Using Special Purpose Vehicles to Minimize Adverse Effects of Redemptions on Long-Term Investors,” The Hedge Fund Law Report, Vol. 2, No. 15 (Apr. 16, 2009); “How Can Hedge Fund Managers Prevent or Mitigate Revocations of Redemption Requests?,” The Hedge Fund Law Report, Vol. 2, No. 21 (May 27, 2009).  As a potentially attractive option for investors, managed accounts offer managers a method for attracting investor assets.  But the various investor and marketing benefits of managed accounts have to be balanced against the significant administrative burdens posed by managing separate accounts – including but not limited to accounting and allocation issues.  On September 17, 2009, GlobeOp Financial Services hosted the Managed Accounts Insights for Investors event in New York City.  During the one-day event, industry participants discussed such topics as structuring and negotiating managed account agreements, potential conflicts of interest and proper due diligence.  This article highlights and discusses the key points discussed at the conference.

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  • From Vol. 2 No.8 (Feb. 26, 2009)

    Investors in Hedge Fund Strategies Increasingly Demanding Separate Accounts to Avoid Gates and Other Consequences of Commingled Investment Vehicles

    Faltering hedge fund performance, high profile frauds and prime broker and counterparty failures have combined to heighten the sensitivity of investors in hedge fund strategies to the type of vehicle in which their assets are invested.  In particular, recent events have highlighted the pitfalls to an investor of commingling its assets with those of other hedge fund investors.  One of the major concerns centers around the timing and quantity of redemptions: in a hedge fund, a substantial, simultaneous volume of redemptions can cause a manager to lower a gate or otherwise restrict withdrawals, or leave remaining investors with less liquid assets – and thus redemptions by one investor can decrease the liquidity of other investors.  Side letters are one way to address the concerns raised by commingled assets.  But regulators and even managers are looking increasingly askance on such arrangements.  Another method used to address these concerns involves investors investing in separate accounts, which often invest alongside or otherwise participate in the investment program of a related hedge fund.  We explain, among other things, the various forms a separate account may take, the potentially adverse Advisers Act consequences allowing investors to participate in a strategy via separate accounts and an alternative to separate accounts being used by managers with increasing frequency.

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