The Hedge Fund Law Report

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

Articles By Topic

By Topic: Directors

  • From Vol. 9 No.47 (Dec. 1, 2016)

    Annual Walkers Fundamentals Seminar Discusses How Managers Attract Investors in a Challenging Market by Tailoring Fund Structures and Governance Policies 

    In a challenging funds market characterized by a high rate of redemptions and growing pressure on fees, fund managers are increasingly adopting strategies to curry favor with institutional investors. The popularity of these approaches is coupled with increased efforts by managers to monitor regulatory developments and ensure their compliance programs can withstand SEC scrutiny. See “How Hedge Fund Managers Can Accommodate Heightened Investor Demands for Bespoke Negative Consent, Liquidity, MFN and Other Provisions in Side Letters” (Oct. 13, 2016). These points came across in the annual Walkers Fundamentals Hedge Fund Seminar held in New York on November 1, 2016, which summarized the recent Walkers white paper that shared a title with the seminar. The speakers at the event included Walkers partners Tim Buckley, Ashley Gunning and Ingrid Pierce; Andrew Kandel, chief compliance officer, co-general counsel and senior managing director of Cerberus Capital Management; and Richard Swanson, managing director and general counsel of York Capital Management. This article highlights the key points presented during the seminar as well as Walkers’ insights contained in the white paper. For the HFLR’s coverage of the Walkers Fundamentals Hedge Fund Seminar from prior years, see: 2015 Seminar; 2014 Seminar; 2013 Seminar; 2012 Seminar; 2011 Seminar; and 2009 Seminar.

    Read Full Article …
  • From Vol. 9 No.42 (Oct. 27, 2016)

    Former Law Firm Partner and Current Independent Director Provides Perspective on Hedge Fund Governance Issues, Regulatory Matters and Allocator Concerns

    Julian Fletcher recently joined Carne Group Financial Services (Carne) as an independent director in its Cayman Islands office after previously practicing as a partner in Mourant Ozannes’ investment funds group. Fletcher has the vantage point of a former practicing attorney when considering issues, regulations and trends in the hedge fund industry in his new capacity as a fund director. For more on fund directors, see “SEC Chair Outlines Expectations for Fund Directors” (Apr. 7, 2016); “Irish Central Bank Issues Guidance on Fund Director Time Commitments” (Jul. 9, 2015); and “Cayman Court of Appeal Overturns Decision Holding Weavering Fund Directors Personally Liable” (Feb. 26, 2015). In connection with his move to Carne, The Hedge Fund Law Report recently interviewed Fletcher about topics relevant to hedge fund managers, including the future of corporate governance; trends in the structuring of boards of directors of hedge funds; how directors consider different components of a hedge fund’s operations; the future of the Cayman Islands hedge fund industry in light of the introduction of the Cayman LLC vehicle and the decision not to extend the Alternative Investment Fund Managers Directive passport; and critical considerations confronting allocators at this time. For additional analysis from Carne, see “Luxembourg Funds Offer Options for Hedge Fund Managers to Access European and Global Investors” (Feb. 11, 2016); and “Identifying and Addressing the Primary Conflicts of Interest in the Hedge Fund Management Business” (Jan. 17, 2013).

    Read Full Article …
  • From Vol. 9 No.14 (Apr. 7, 2016)

    SEC Chair Outlines Expectations for Fund Directors

    The board of directors plays a central role in mitigating conflicts inherent in the relationship between a hedge fund and its manager. See “Conflicts Remain an Overarching Concern for the SEC’s Asset Management Unit” (Mar. 12, 2015). In her keynote address at the Mutual Fund Directors Forum 2016 Policy Conference, SEC Chair Mary Jo White shared her view on the role of directors in assessing risks to mutual funds and conveyed her perspective on what fund directors should be considering and doing in 2016. Delivered to mutual fund directors, White’s remarks also provide valuable guidance to hedge funds and other private investment funds as to SEC expectations for director oversight. Specifically, White suggested appropriate questions for fund directors to ask, explored the limits of director oversight and provided the enforcement perspective on fund directors. This article summarizes the portions of White’s speech most relevant to hedge fund managers. For more on hedge fund governance, see “Walkers Fundamentals Hedge Fund Seminar Addresses Fund Structuring Trends, Governance Best Practices, Fee and Liquidity Terms, Irish Vehicles, Marketing in Asia and FATCA” (Feb. 12, 2015); and “Former SEC Commissioner Roel Campos Discusses Hedge Fund Governance With The Hedge Fund Law Report” (Mar. 8, 2012). For additional insight from White, see “SEC Chair Emphasizes Enforcement Focus on Strong Remedies and Individual Liability” (Nov. 12, 2015); “SEC Chair Highlights Two Types of Risks Hedge Fund Managers Must Consider” (Oct. 29, 2015); and “SEC Chair White Describes the SEC’s Game Plan With Respect to the Asset Management Industry” (Dec. 18, 2014).

    Read Full Article …
  • From Vol. 8 No.27 (Jul. 9, 2015)

    Irish Central Bank Issues Guidance on Fund Director Time Commitments

    The Central Bank of Ireland (Central Bank) recently announced recommendations regarding individuals holding numerous directorships and the satisfaction of their oversight duties.  This announcement follows a “thematic review” of the number of directorships held by individuals on the boards of Irish investment funds and fund management companies and assessment of the time allocated by such individuals to their service as directors.  This article explores the Central Bank’s recent letter to industry on the subject and its related Guidance on Directors’ Time Commitments.  For additional information on governance in the private fund space in general, and the roles of directors in particular, see “Walkers Fundamentals Hedge Fund Seminar Addresses Fund Structuring Trends, Governance Best Practices, Fee and Liquidity Terms, Irish Vehicles, Marketing in Asia and FATCA,” The Hedge Fund Law Report, Vol. 8, No. 6 (Feb. 12, 2015); and “Cayman Islands Government Introduces Bill That Would Require Registration and Licensing of Certain Hedge Fund Directors,” The Hedge Fund Law Report, Vol. 7, No. 12 (Mar. 28, 2014). 

    Read Full Article …
  • From Vol. 8 No.8 (Feb. 26, 2015)

    Cayman Court of Appeal Overturns Decision Holding Weavering Fund Directors Personally Liable

    Governance of Cayman hedge funds in general, and the duties and qualifications of their directors in particular, have been hot topics in the industry for several years.  See “Cayman Islands Government Introduces Bill That Would Require Registration and Licensing of Certain Hedge Fund Directors,” The Hedge Fund Law Report, Vol. 7, No. 12 (Mar. 28, 2014); and “Cayman Islands Monetary Authority Introduces Proposals to Apply Revised Governance Standards to CIMA-Regulated Hedge Funds and Require Registration and Licensing of Fund Directors,” The Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013).  One important source of that concern arose out of the 2009 collapse of Weavering Capital.  In a landmark decision following that collapse, the Cayman Grand Court held the fund’s independent directors personally liable for the fund’s losses by reason of their “wilful neglect” of their duties.  See “Cayman Grand Court Holds Independent Directors of Failed Hedge Fund Weavering Macro Fixed Income Fund Personally Liable for Losses Due to their Willful Failure to Supervise Fund Operations ,” The Hedge Fund Law Report, Vol. 4, No. 31 (Sep. 8, 2011).  The Cayman Court of Appeal has recently overturned that ruling on the ground that, although the directors had breached their duties to the fund, their conduct did not rise to the level of “wilful neglect or default.”  This article summarizes the Court of Appeal’s analysis.

    Read Full Article …
  • From Vol. 7 No.44 (Nov. 20, 2014)

    Eight Important Regulatory and Operational Differences Between Managing Hedge Funds and Alternative Mutual Funds

    Participants at a recent Financial Research Associates (FRA) event analyzed eight of the most important regulatory and operational considerations in managing alternative mutual funds.  Participants also highlighted how each of those considerations applies differently to hedge funds and alternative mutual funds.  For example, both hedge funds and alternative mutual funds need to be concerned with leverage limitations.  However, the sources of such limitations, their impact on investment strategy, the operational infrastructure necessary to implement and monitor such limitations, relevant compliance issues and other dynamics are different for the different products.  While superficially similar – especially when following similar strategies – hedge and mutual funds are very different products from the perspectives of operations and regulatory compliance.  That was the core thesis of the FRA program; and this article conveys both the key points of difference and the business consequences of such product variation.  See also “The First Steps to Take When Joining the Rush to Offer Registered Liquid Alternative Funds,” The Hedge Fund Law Report, Vol. 7, No. 42 (Nov. 6, 2014); “How Can Hedge Fund Managers Organize and Operate Alternative Mutual Funds to Access Retail Capital? (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 6 (Feb. 7, 2013).

    Read Full Article …
  • From Vol. 7 No.12 (Mar. 28, 2014)

    Cayman Islands Government Introduces Bill That Would Require Registration and Licensing of Certain Hedge Fund Directors

    For at least the last four years, the Cayman Islands legislative, regulatory and judicial authorities have been focused on improving fund governance.  Three noteworthy examples of this focus include the August 2011 Weavering decision, the January 2013 Statement of Guidance on fund governance and the January 2014 issues paper on statutory codification of directors’ duties.  On the last, see “What Are the Duties of Directors of Cayman Islands Hedge Funds, and Should Those Duties Be Codified?,” The Hedge Fund Law Report, Vol. 7, No. 6 (Feb. 13, 2014).  The latest action by Cayman authorities on fund governance is a bill (Bill), gazetted on March 21, 2014, with the short title “Directors Registration and Licensing Law, 2014.”  The Bill generally requires directors of “covered entities” to be registered and requires professional directors of covered entities to be licensed.  This article explains the mechanics of the proposed registration and licensing regime, the regime’s application to non-resident directors, the proposed phase-in schedule, disciplinary provisions, insurance requirements and the “register of directors” referenced in the Bill.

    Read Full Article …
  • From Vol. 7 No.6 (Feb. 13, 2014)

    What Are the Duties of Directors of Cayman Islands Hedge Funds, and Should Those Duties Be Codified?

    Corporate governance reform has been on the radar of the Cayman Islands for several years.  The landmark 2011 decision by the Financial Services Division of the Cayman Islands Grand Court, Weavering Macro Fixed Income Fund Limited v. Stefan Peterson and Hans Ekstrom, held that a fund’s directors had willfully neglected their duties to supervise a fund’s operations when they acted as little more than figureheads or rubber stamps of manager actions.  See “The Cayman Islands Weavering Decision One Year Later: Reflections by Weavering’s Counsel and One of the Joint Liquidators,” The Hedge Fund Law Report, Vol. 5, No. 36 (Sep. 20, 2012).  In January 2013, the Cayman Islands Monetary Authority (CIMA) issued proposed rule amendments and proposed revised governance standards – spelled out in the revised Statement of Guidance on fund Governance (Governance SOG) – for hedge funds and their directors.  See “Cayman Islands Monetary Authority Introduces Proposals to Apply Revised Governance Standards to CIMA-Regulated Hedge Funds and Require Registration and Licensing of Fund Directors,” The Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013).  In December 2013, CIMA adopted the final Governance SOG.  Cayman directors’ duties have traditionally been derived primarily from common law principles of care, skill and diligence, and good faith, loyalty and other fiduciary duties.  The CIMA governance standards mentioned above were one effort to codify some of those principles with respect to directors of CIMA-regulated entities.  In another step towards governance reform, the Cayman Islands Law Reform Commission recently released an “Issues Paper” exploring the duties of Cayman directors and asking whether there would be any improvement in corporate governance if those duties were enumerated and codified in Cayman statutes.  This article summarizes the key points from the Issues Paper.

    Read Full Article …
  • From Vol. 6 No.27 (Jul. 11, 2013)

    CIMA-Sponsored Survey Highlights Hedge Fund Industry Views on Cayman Islands Corporate Governance Practices and Suggested Reforms

    As part of its corporate governance reform process, the Cayman Islands Monetary Authority (CIMA) recently surveyed hedge fund managers, investors, directors and service providers regarding their views on corporate governance at Cayman Islands hedge funds.  See “Cayman Islands Monetary Authority Introduces Proposals to Apply Revised Governance Standards to CIMA-Regulated Hedge Funds and Require Registration and Licensing of Fund Directors,” The Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013).  Specifically, the survey solicited the views of respondents on what elements comprise robust corporate governance at a Cayman fund; the strengths and weaknesses of Cayman boards; the adequacy of the current Cayman governance regime; the types of information that would assist in evaluating the robustness of a fund’s governance standards; and the areas in which Cayman corporate governance standards can be improved.  Among other things, the survey also drilled down on issues such as whether there should be a limit placed on the number of directorships that may be held by a single director and whether it would be beneficial to require disclosure of the total number of directorships held by each director.  This article summarizes the noteworthy findings from the survey.  For more on Cayman corporate governance issues, see “Speakers at Walkers Fundamentals Hedge Fund Seminar Discuss Recent Trends in Hedge Fund Terms, Corporate Governance, Side Letters, FATCA and Cayman Fund Regulation,” The Hedge Fund Law Report, Vol. 5, No. 48 (Dec. 20, 2012).

    Read Full Article …
  • From Vol. 6 No.22 (May 30, 2013)

    Can the SEC Bar a Hedge Fund Manager from Serving as an Officer or Director of a Public Company?

    The SEC can request various remedies in civil actions brought against hedge fund managers, including a bar prohibiting the manager from serving as an officer or director of a public company.  Because such a remedy can significantly impact a defendant’s ability to make a living, it is not surprising that such bars are challenged.  A federal district court recently ruled on a hedge fund manager’s challenge to an officer and director bar requested by the SEC in a civil action where the manager has been accused of misusing hedge fund assets to make concentrated investments in a financially-distressed company for which he served as the chairman of the board of directors.  One of the two arguments advanced by the manager was that the statutory bar was not an “appropriate” remedy given the factual allegations.  This article describes the factual background in this case; the legal arguments advanced; and the court’s ruling on the manager’s motion for partial judgment on the pleadings.  For a detailed discussion of the SEC’s complaint in this matter, see “Recent SEC Enforcement Action Provides a Dramatic Example of Style Drift in the Hedge Fund Context,” The Hedge Fund Law Report, Vol. 4, No. 43 (Dec. 1, 2011).

    Read Full Article …
  • From Vol. 6 No.9 (Feb. 28, 2013)

    U.K. Appellate Court Holds That Hedge Fund Manager Employees May Be Personally Liable for Unreasonably Relying on the Representations of a Hedge Fund Manager Principal Regarding Performance and Portfolio Composition

    The best hedge fund managers are often great salespeople, and a good bit of their sales efforts are often directed internally – in particular, at persuading non-investment professionals to buy into their view of the world.  This is fine so long as that view is compelling and legitimate.  But this becomes problematic for all involved when that view is fraudulent.  A recent U.K. appellate court decision indicates that employees of hedge fund managers may be liable in cases where they accept at face value – and relay to third parties – representations from a manager principal that they knew or should have known to be false.  “He told me so” is not a valid defense to a suit for negligence; and employees with limited authority can be hit with effectively unlimited liability.

    Read Full Article …
  • From Vol. 5 No.37 (Sep. 27, 2012)

    Cayman Grand Court Rejects Validity of Side Letter Entered Into Between an Investor in Investment Vehicles That Invested in the Matador Fund and a Director of the Matador Fund

    A recent decision handed down by the Grand Court of the Cayman Islands (Court) emphasizes the importance of: (1) ensuring that the correct parties enter into side letters between an investor and a fund; and (2) ensuring that a fund’s governing documents permit the fund to enter into the type of side letter contemplated by the fund and the investor.  This decision follows on the heels of another recent decision handed down by the Court that highlights similar principles.  See “Recent Cayman Grand Court Decision Demonstrates the Practical and Legal Challenges of Investing in Hedge Funds through Nominees,” The Hedge Fund Law Report, Vol. 5, No. 29 (Jul. 26, 2012).

    Read Full Article …
  • From Vol. 5 No.36 (Sep. 20, 2012)

    The Cayman Islands Weavering Decision One Year Later: Reflections by Weavering’s Counsel and One of the Joint Liquidators

    Last month marks the one-year anniversary of the decision handed down by the Grand Court of the Cayman Islands (Court) against the directors of Weavering Macro Fixed Income Fund, in which both directors were found to have breached their duties and were ordered to pay damages in the amount of USD$111 million.  In the days and weeks which followed, many stakeholders offered their own critique of the decision as well as the “checklist” promulgated by Mr. Justice Andrew Jones QC of the steps which an independent non-executive director of an investment fund should take in order to properly discharge his duties.  Some critiques were lucid and objective dispositions of the decision, and some were not.  Perhaps it was the size of the award, or that it was the first time that directors of a failed Cayman Islands investment fund had been found liable in damages for a fund’s losses, which provoked such interest; but no doubt the views expressed by many were, and are, influenced by personal circumstances.  But what has been the true impact of the decision, and what mark has it left on the laws relating to directors generally?  In this article Mourant Ozannes’ Shaun Folpp, who acted for Weavering with respect to both the first instance proceedings and the recent appeal, and Mr. Ian Stokoe of PwC Corporate Finance and Recovery (Cayman) Limited, one of Weavering’s Joint Official Liquidators, explore these very issues, and reflect on one of the most talked about decisions ever to be handed down by the Court.  For background on the decision, see “Cayman Grand Court Holds Independent Directors of Failed Hedge Fund Weavering Macro Fixed Income Fund Personally Liable for Losses Due to their Willful Failure to Supervise Fund Operations,” The Hedge Fund Law Report, Vol. 4, No. 31 (Sep. 8, 2011).

    Read Full Article …
  • From Vol. 5 No.30 (Aug. 2, 2012)

    Hedge Fund Side Letters: The View from the Fund Director’s Perspective

    Most hedge funds are asked at one time or another by certain investors to provide side letters agreeing to preferential dealing, investment or other strategic terms.  There are clear cases where a side letter would not be acceptable, e.g., it contains plainly egregious terms; has no legitimate purpose; or is clearly contrary to what the hedge fund or hedge fund manager is doing in practice.  In most circumstances, however, there is no black and white answer as to what constitutes an acceptable side letter term or where the line should be drawn.  In crafting a side letter term that is in the best interest of the hedge fund (and in particular, other investors in the fund), there is a difficult balancing act that managers must perform.  On the one hand, the side letter can be used to facilitate a large investment that attracts other strategic investors, which could benefit the fund and the execution of its investment strategy.  On the other hand, side letters generally raise various fiduciary and other concerns that must be addressed.  In a guest article, Victor Murray, an independent accredited director at MG Management Ltd., discusses: side letter disclosure; ERISA considerations relating to side letters; unsavory terms; shareholder actions relating to side letters; lack of statutory provisions; derivative actions; fraud on the minority; and best practices in relation to directors’ review of side letters.

    Read Full Article …
  • From Vol. 5 No.27 (Jul. 12, 2012)

    U.K. High Court of Justice Finds Magnus Peterson Liable for Fraud in Collapse of Hedge Fund Manager Weavering Capital and Weavering Macro Fixed Income Fund

    In 1998, defendant Magnus Peterson formed hedge fund manager Weavering Capital (UK) Limited (WCUK).  He served as a director, chief executive officer and investment manager.  One fund managed by WCUK, the open-end Weavering Macro Fixed Income Fund Limited (Fund), collapsed in the midst of the 2008 financial crisis.  Peterson was accused of disguising the Fund’s massive losses by entering into bogus forward rate agreements and interest rate swaps with another fund that he controlled.  In March 2009, the Fund suspended redemptions and went into liquidation when it could not meet investor redemption requests.  At that time, WCUK went into administration (bankruptcy).  WCUK’s official liquidators, on behalf of WCUK, brought suit against Peterson, his wife, certain WCUK employees and directors and others, seeking to recover damages for fraud, negligence and breach of fiduciary duty and seeking to recover certain allegedly improper transfers of funds by Peterson.  After a lengthy hearing, the U.K. High Court of Justice, Chancery Division (Court), has allowed virtually all of those claims, ruling that Peterson did indeed engage in fraud.  In a separate action, the Fund’s official liquidators recovered damages from Peterson’s brother, Stefan Peterson, and their stepfather, Hans Ekstrom, who served as Fund directors, based on their willful failure to perform their supervisory functions as directors.  See “Cayman Grand Court Holds Independent Directors of Failed Hedge Fund Weavering Macro Fixed Income Fund Personally Liable for Losses Due to their Willful Failure to Supervise Fund Operations,” The Hedge Fund Law Report, Vol. 4, No. 31 (Sep. 8, 2011).  This article summarizes the factual background and the Court’s legal analysis in the liquidators’ action against Peterson and others.

    Read Full Article …
  • From Vol. 5 No.23 (Jun. 8, 2012)

    RCA Symposium Focuses on Hedge Fund Governance, Form PF, Enterprise Risk Management, Regulatory Enforcement, Criminal Prosecution, CCO and GC Liability and Third Party Relationships (Part Two of Two)

    On April 16, 2012, the Regulatory Compliance Association held its Regulation and Risk Thought Leadership Symposium (RCA Symposium) in New York City at the Pierre Hotel.  The RCA Symposium brought together leading practitioners and regulators in a series of panel discussions, each of which offered unique insight on various topics of relevance for hedge fund managers.  This is the second article in a two-part series summarizing the highlights from the RCA Symposium.  This second article discusses the sessions covering: the new paradigm of regulatory enforcement and white-collar prosecution; chief compliance officer and general counsel liability; and re-evaluation of the operating model for third party relationships.  The first article discussed the sessions covering: fund governance issues; interpreting, preparing for and completing Form PF; and enterprise risk management for hedge fund managers.  See “RCA Symposium Focuses on Hedge Fund Governance, Form PF, Enterprise Risk Management, Regulatory Enforcement, Criminal Prosecution, CCO and GC Liability and Third Party Relationships (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 22 (May 31, 2012).

    Read Full Article …
  • From Vol. 5 No.14 (Apr. 5, 2012)

    Don Seymour Discusses Hedge Fund Governance and the Impact of the Recent SEC-CIMA Cooperation Arrangement on Hedge Fund Manager Examinations

    On March 23, 2012, the U.S. Securities and Exchange Commission (SEC) announced that it had entered into a supervisory cooperation arrangement with the Cayman Islands Monetary Authority (CIMA).  In its press release announcing the memorandum of understanding (MOU) embodying the supervisory cooperation arrangement, the SEC identified five categories of information that may be shared pursuant to the arrangement.  Those five categories include information required to: (1) conduct routine supervision; (2) monitor risk concentrations; (3) identify emerging systemic risks; (4) better understand a globally active regulated entity’s compliance culture; and (5) conduct on-site examinations of registered entities located abroad.  See “Is This an Inspection or an Investigation? The Blurring Line Between Examinations of and Enforcement Actions Against Private Fund Managers,” The Hedge Fund Law Report, Vol. 5, No. 13 (Mar. 29, 2012).  Hedge fund managers, lawyers, compliance professionals and others have asked The Hedge Fund Law Report what this MOU means for their businesses.  To help answer that question, we recently interviewed Don Seymour.  Seymour is the founder and Managing Director of dms Management Ltd. (dms Management) and the former head of the Investment Services Division of the CIMA.  At the CIMA, Seymour directed the authorization, supervision and enforcement of regulated mutual funds, including hedge funds, under the Mutual Funds Law of the Cayman Islands, and the supervision of company managers under the Cayman Companies Management Law.  Seymour brought his CIMA experience to bear in explaining how the MOU will impact Cayman-domiciled hedge funds and their managers with respect to data collection and sharing, supervision, monitoring, examinations and regulatory coordination.  Moreover, based on his service on the boards of several notable investment companies, Seymour offered insight on hedge fund governance issues, including: director independence; evolution in best corporate governance practices following the decision in Weavering Macro Fixed Income Fund Limited v. Stefan Peterson and Hans Ekstrom; valuation expertise required of fund directors; specific steps that directors can take to manage fund conflicts of interest; maximum number of directorships; and whether investors should have rights to appoint fund directors.  This article includes the full transcript of our interview with Seymour.

    Read Full Article …
  • From Vol. 5 No.11 (Mar. 16, 2012)

    Two Delaware Chancery Court Decisions Help Define the Scope of Liability for Private Fund Portfolio Company Directors

    Hedge and private equity fund managers whose employees serve as directors of portfolio companies should understand the scope of potential liability with respect to their service as a company director and how they can shield themselves from such liability.  The Delaware Chancery Court has, within the past two years, issued two separate decisions in a single case that will help define company director liability.  This article details these two decisions.

    Read Full Article …
  • From Vol. 5 No.10 (Mar. 8, 2012)

    Former SEC Commissioner Roel Campos Discusses Hedge Fund Governance with The Hedge Fund Law Report

    While day-to-day control of a hedge fund is largely vested in the hedge fund’s manager, the relationship between manager and fund is marked by inherent conflicts of interest.  See, e.g., “When and How Can Hedge Fund Managers Engage in Transactions with Their Hedge Funds?,” The Hedge Fund Law Report, Vol. 4, No. 45 (Dec. 15, 2011).  Hedge fund investors generally look to three factors to mitigate those conflicts: law, practice and structuring.  Legally, fiduciary duty and regulatory and private enforcement of securities laws are intended to mitigate conflicts.  Practically, reputational considerations and basic canons of ethical behavior are expected to limit manager overreaching.  And structurally, the boards of directors of certain hedge funds are intended to serve as a check on manager conflicts and other manager behavior contrary to the interests of investors.  Prior to the credit crisis, investors looked primarily to the first two factors to police conflicts.  After the credit crisis and the concomitant exposure of notable frauds, investors and regulators are paying increasing attention to the role of hedge fund boards as the investor’s internal advocate.  In short, investors and regulators now expect directors to be informed, engaged and competent.  This view was resoundingly echoed by the Grand Court of the Cayman Islands in the August 2011 Weavering Macro Fixed Income Fund Limited (In Liquidation) decision, in which the Grand Court found hedge fund directors personally liable for losses caused by their willful failure to supervise fund operations.  See “Corporate Governance Best Practices for Cayman Islands Hedge Funds,” The Hedge Fund Law Report, Vol. 5, No. 3 (Jan. 19, 2012).  It is one thing to say that hedge fund directors need to be more informed, engaged and competent.  It is another thing altogether to define with specificity what these concepts mean in practice.  In an effort to do so, a session at the Regulatory Compliance Association’s Spring 2012 Regulation & Risk Thought Leadership Symposium will focus on hedge fund governance.  That Symposium will be held on April 16, 2012 at the Pierre Hotel in New York.  For more information, click here.  To register, click here.  (Subscribers to The Hedge Fund Law Report are eligible for discounted registration.)  As part and parcel of the RCA’s effort to define with specificity the role of hedge fund directors, The Hedge Fund Law Report recently interviewed Roel Campos, one of the anticipated participants in the fund governance session, a former SEC Commissioner and a current Partner at Locke Lord LLP.  Campos’ high-level SEC experience gives him particularly useful insight into regulatory expectations with respect to hedge fund directors; and his regulatory experience is complemented by private legal practice and corporate experience.  Campos, accordingly, has a uniquely well-rounded view of what hedge fund directors should do, and the practical constraints on what they can do.  Our interview focused on: the key purposes and goals of hedge fund boards; how hedge funds can make their boards more effective and accountable; what constitutes an “independent” director; the role to be played by hedge fund boards in the valuation of assets and implementation of risk management policies; the maximum number of boards on which one director can serve; whether investors should talk to hedge fund boards during the due diligence process; and whether hedge funds should conduct background checks on prospective directors.  This article contains the full transcript of our interview with Campos.

    Read Full Article …
  • From Vol. 5 No.3 (Jan. 19, 2012)

    Corporate Governance Best Practices for Cayman Islands Hedge Funds

    With the financial crisis of 2008 and 2009, corporate governance practices in the global alternative investment funds industry came under the microscope.  While investor views on how fund directors performed during the crisis vary, what is clear a few years on is that investors, hedge fund managers and service providers have a much better understanding of the role of an independent non-executive director of an alternative investment fund and that a best practice framework has started to become a topic for active discussion in the industry.  As a result, hedge fund investors – particularly institutional investors – are increasingly scrutinizing a fund’s corporate governance structure to ensure that the directors are diligently and skillfully performing their duties in the best interest of the hedge funds on whose boards they serve.  With the global hedge fund industry having its largest presence in the Cayman Islands, this guest article looks at some of the issues relating to corporate governance from the Cayman fund perspective.  The authors of this guest article are Tim Frawley, a Partner in the Investment Funds practice of Maples and Calder, and Peter Huber, Global Co-Head of Maples Fiduciary Services.  Frawley and Huber begin with a historical accounting of Cayman company fund governance.  The authors then explain the various duties owed and roles performed by fund directors.  Next, the authors discuss the findings and implications from the Weavering Macro Fixed Income Fund Limited (In Liquidation) decision handed down last year.  The authors then move to a survey of some current hot-button issues related to fund governance, and conclude with a discussion of anticipated fund governance challenges facing hedge fund managers.

    Read Full Article …
  • From Vol. 5 No.1 (Jan. 5, 2012)

    Legal and Operational Due Diligence Best Practices for Hedge Fund Investors

    In the wake of the financial crisis in late 2008, many investors were left trapped in suspended, gated or otherwise illiquid hedge funds.  Unfortunately, for many investors who had historically taken a passive role with respect to their hedge fund investments, it took a painful lesson to learn that control over fundamental fund decisions was in the hands of hedge fund managers.  Decisions such as the power to suspend or side pocket holdings were vested in managers either directly or through their influence over the board of directors of the fund.  In these situations, which were not uncommon, leaving control in the hands of the manager rather than a more independent board gave rise to a conflict of interest.  Managers were in some cases perceived to be acting in their own self-interest at the expense, literally and figuratively, of the fund and, consequently, the investors.  The lessons from the financial crisis of 2008 reinforced the view that successful hedge fund investing requires investors to approach the manager selection process with a number of considerations in mind, including investment, risk, operational and legal considerations.  Ideally, a hedge fund investment opportunity will be structured to sufficiently protect the investor’s rights (i.e., appropriate controls and safeguards) while providing an operating environment designed to maximize investment returns.  Striking such a balance can be challenging, but as many investors learned during the financial crisis, it is a critical element of any successful hedge fund program.  The focus on hedge fund governance issues has intensified in the wake of the financial crisis, with buzz words such as “managed accounts,” “independent directors,” “tri-party custody solutions” and “transparency” now dominating the discourse.  Indeed, investor efforts to improve corporate governance and control have resulted in an altering of the old “take it or leave it” type of hedge fund documents, which have become more accommodative towards investors.  In short, in recent years investors have become more likely to negotiate with managers, and such negotiations have been more successful on average.  In a guest article, Charles Nightingale, a Legal and Regulatory Counsel for Pacific Alternative Asset Management Company, LLC (PAAMCO), and Marc Towers, a Director in PAAMCO’s Investment Operations Group, identify nine areas on which institutional investors should focus in the course of due diligence.  Within each area, Nightingale and Towers drill down on specific issues that hedge fund investors should address, questions that investors should ask and red flags of which investors should be aware.  The article is based not in theory, but in the authors’ on-the-ground experience conducting legal and operational due diligence on a wide range of hedge fund managers – across strategies, geographies and AUM sizes.  From this deep experience, the authors have extracted a series of best practices, and those practices are conveyed in this article.  One of the main themes of the article is that due diligence in the hedge fund arena is an interdisciplinary undertaking, incorporating law, regulation, operations, tax, accounting, structuring, finance and other disciplines, as well as – less tangibly – experience, judgment and a good sense of what motivates people.  Another of the themes of the article is that due diligence is a continuous process – it starts well before an investment and often lasts beyond a redemption.  This article, in short, highlights the due diligence considerations that matter to decision-makers at one of the most sophisticated allocators of capital to hedge funds.  For managers looking to raise capital or investors looking to deploy capital intelligently, the analysis in this article merits serious consideration.

    Read Full Article …
  • From Vol. 5 No.1 (Jan. 5, 2012)

    Ernst & Young Survey Juxtaposes the Views of Hedge Fund Managers and Investors on Hedge Fund Succession Planning, Governance, Administration, Expense Pass-Throughs and Due Diligence

    Ernst & Young (E&Y) recently released the 2011 edition of its annual hedge fund survey entitled, “Coming of Age: Global Hedge Fund Survey 2011” (Report).  The Report conveys and compares the views of hedge fund managers and investors on topics including succession, independent board oversight, use of administrators, expense pass-throughs and due diligence.  This article summarizes the more salient findings from the Report.  One of the Report’s many interesting insights is that managers frequently receive little in the way of feedback when a potential investor declines an investment.  The Report partially fills this “feedback gap” by offering generalized insight on what matters most to investors.  For example, managers may be surprised to learn that the absence of a robust and reliable succession plan may have played as much or more of a role in a lost investment as performance or even operational issues.  (The HFLR will be covering succession planning for hedge fund managers in an upcoming issue.)  More generally, the depth of the disparity in perception between managers and investors on a range of topics, as found by the Report, is at times startling.  The Report therefore offers a sobering reality check for both managers and investors.  Both sides need one another, albeit for different reasons, and the lifecycle of an investment can be significantly more productive if expectations and assumptions are better aligned.

    Read Full Article …
  • From Vol. 4 No.39 (Nov. 3, 2011)

    Can an Arbitration Provision Signed by a Hedge Fund Manager, but Not by a Hedge Fund Director, Bind a Hedge Fund?

    On September 29, 2011, Judge Elizabeth A. Kovachevich of the United States District Court for the Middle District of Florida issued an order (Order) compelling arbitration of 23 of the “clawback” actions brought by the receiver (Receiver) of Arthur Nadel’s fraudulent hedge funds to recover false profits from the funds’ investors.  Following the discovery that Nadel was running a massive Ponzi scheme, the Receiver filed numerous such fraudulent conveyance actions against investors in an attempt to claw back any money withdrawn in excess of the investors’ capital contributions.  On the differing treatment in bankruptcy between capital invested in a Ponzi scheme and withdrawals in excess of such capital contributions, see “Two Recent Federal Court Decisions Clarify the Differing Treatment under SIPA of Returned Principal and Fictitious Profits,” The Hedge Fund Law Report, Vol. 4, No. 34 (Sep. 29, 2011).  Certain of the investors demanded that the suits against them be arbitrated as opposed to litigated.  The Court ruled on the investors’ demands, and in doing so, addressed the question of whether the existence of an arbitration provision in a hedge fund document signed by a manager is sufficient, absent extraordinary circumstances, to force the fund to attack the validity of that document in front of an arbitrator as opposed to a judge.

    Read Full Article …
  • From Vol. 4 No.35 (Oct. 6, 2011)

    Eight Corporate Governance Steps That Hedge Fund Managers Should Consider in Response to Concerns Expressed by Institutional Investors

    Fund governance provider Carne Global Financial Services (Carne) recently released a research paper entitled “Corporate Governance in Hedge Funds: Investor Survey 2011” (Report).  The Report is a summary of the results of Carne’s survey (Survey) of institutional hedge fund allocators with respect to the issue of hedge fund corporate governance.  Overall, the Report demonstrates a desire among investors for higher corporate governance standards at hedge funds.  The Report attributes this desire to three major factors: (1) anxiety stemming from the financial crisis that began in 2008; (2) the recent decision in Weavering Macro Fixed Income Fund Limited v. Stefan and Hans Ekstrom; and (3) a push by regulators and others to crack down on hedge funds in order to improve their public image.  See “Cayman Grand Court Holds Independent Directors of Failed Hedge Fund Weavering Macro Fixed Income Fund Personally Liable for Losses Due to their Willful Failure to Supervise Fund Operations,” The Hedge Fund Law Report, Vol. 4, No. 31 (Sep. 8, 2011).  Hedge fund managers can look to the Survey results as a barometer of investor sentiment and as a tool for benchmarking the sufficiency of the governance of their own funds.  See also “The Case in Favor of Focused, Experienced and Independent Hedge Fund Directors,” The Hedge Fund Law Report, Vol. 4, No. 3 (Jan. 21, 2011).  This article summarizes the most important results of the Report including: the level of importance allocators place on corporate governance; allocators’ current satisfaction with corporate governance standards at hedge funds; areas of corporate governance that allocators believe require the most improvement; allocators’ preferences for board composition and oversight; and the degree of allocator concern about directors’ conflicts of interest.  The article concludes with a suggested list of eight corporate governance action points for hedge fund managers.

    Read Full Article …
  • From Vol. 4 No.31 (Sep. 8, 2011)

    Cayman Grand Court Holds Independent Directors of Failed Hedge Fund Weavering Macro Fixed Income Fund Personally Liable for Losses Due to their Willful Failure to Supervise Fund Operations

    In a judgment with serious implications for those who serve as directors of Cayman Islands hedge funds, the Grand Court of the Cayman Islands has ruled that Stefan Peterson and Hans Ekstrom, who were the independent directors of Weavering Macro Fixed Income Fund Limited (Fund), were personally liable for $111 million of excess redemption payments that had been made by the Fund using a wildly inflated net asset value.  The Court found that those directors had willfully neglected their duties to supervise the operation of the Fund and had served as little more than rubber stamps for the Fund’s founder, Magnus Peterson.  They missed or ignored critical – and obvious – signs that something was seriously amiss with the Fund.  The Court’s judgment, summarized in this article, provides a useful roadmap for the level of engagement, due diligence and oversight required of directors of Cayman Islands hedge funds.  For our original coverage of the Fund’s collapse, see “The Weavering Blow-Up and What It May Mean for Boards of Directors of Cayman Islands Hedge Funds,” The Hedge Fund Law Report, Vol. 2, No. 13 (April 2, 2009).  For a discussion of the role that non-executive directors should play in the governance of offshore hedge funds and the protection of investors, see “The Case In Favor of Non-Executive Directors of Offshore Hedge Funds with Investment Expertise, Fewer Directorships and Independence from the Manager,” The Hedge Fund Law Report, Vol. 3, No. 50 (Dec. 29, 2010), and a letter to the editor in response, “The Case in Favor of Focused, Experienced and Independent Hedge Fund Directors,” The Hedge Fund Law Report, Vol. 4, No. 3 (Jan. 21, 2011).

    Read Full Article …
  • From Vol. 4 No.3 (Jan. 21, 2011)

    The Case in Favor of Focused, Experienced and Independent Hedge Fund Directors

    In a letter to the Editor of The Hedge Fund Law Report, Kevin Ryan, Founder of HedgeDirector, addresses points raised in our article: “The Case In Favor of Non-Executive Directors of Offshore Hedge Funds with Investment Expertise, Fewer Directorships and Independence from the Manager,” The Hedge Fund Law Report, Vol. 3, No. 50 (Dec. 29, 2010).  Ryan argues that while our article paraphrased the arguments in his firm’s white paper clearly, it nonetheless made some unrealistic assumptions about the information disparity between fund managers and investors, and did not reflect the experiences of most hedge fund investors on a day-to-day basis.  Ryan’s letter is an eloquent and important contribution to the ongoing debate on the appropriate qualifications of hedge funds directors.

    Read Full Article …
  • From Vol. 3 No.50 (Dec. 29, 2010)

    Ten Due Diligence Questions that Might Have Helped Uncover the Fraud Described in the SEC's Recent Administrative Proceeding against Subprime Automobile Loan Hedge Fund Manager and Its Principals

    On December 21, 2010, the SEC instituted and settled administrative proceedings against a San Francisco-based hedge fund management company and its principals.  A hedge fund managed by that company purported to invest almost exclusively in subprime auto loans, but in fact wound up "investing" largely in debt owed to the fund by entities controlled by principals of the management company and other hedge funds managed by the management company.  The SEC's Order in the matter is a study in conflicts of interest, strategy drift, material misstatements and omissions in offering documents and Form ADV and improper principal trades.  Working from the alleged facts of this matter, we derive ten due diligence questions that any investor should add to its questionnaire or incorporate into in-person meetings with managers.  Importantly, these are questions that should be asked periodically, not just prior to an initial investment.

    Read Full Article …
  • From Vol. 3 No.50 (Dec. 29, 2010)

    The Case In Favor of Non-Executive Directors of Offshore Hedge Funds with Investment Expertise, Fewer Directorships and Independence from the Manager

    In a white paper dated November 2010, HedgeDirector generally argues that: (1) boards of offshore hedge funds, especially the non-executive directors, have an important role to play in making sure that hedge funds appropriately pursue their investment goals and avoid undue investment, regulatory and other risks; (2) offshore boards generally perform that role inadequately because directors typically lack investment expertise, serve on too many boards and are inappropriately influenced by the hedge fund manager; (3) the governance and investor protection roles of offshore boards can be better effectuated by directors with alternative investment experience, fewer directorships and more independence from the manager; and (4) stronger offshore boards would help persuade supervisors that the hedge fund industry can adequately regulate itself, and thus would diminish the likelihood of further hedge fund regulation.  This article outlines the argument of the white paper in greater detail, and critiques that argument.

    Read Full Article …
  • From Vol. 2 No.15 (Apr. 16, 2009)

    Directors of Cayman Islands Hedge Funds Assume a More Substantive Governance Role in Response to Institutional Investor Demands

    As hedge fund investment performance has stumbled, institutional investors have ramped up the rigor of their pre-investment and ongoing due diligence, subjecting heretofore ignored aspects of hedge fund operations to new levels of scrutiny.  One such area of newfound concern among investors is the role of directors of hedge funds organized in the Cayman Islands.  Accurate or not, the general perception in the hedge fund industry has been that Cayman directors have played a less substantive role in the governance of the hedge funds they are supposed to oversee.  Moreover, as a result of a dearth of qualified directors, certain individuals serve on the boards of dozens of hedge funds, which renders it virtually impossible for those directors to actively participate in the governance of any one fund.  We discuss the evolving role of Cayman directors, and the role of institutional investors in that evolution.

    Read Full Article …
  • From Vol. 2 No.13 (Apr. 2, 2009)

    The Weavering Blow-Up and What It May Mean for Boards of Directors of Cayman Islands Hedge Funds

    The collapse of Weavering Capital (UK) Limited came quickly over an eleven-day period in March 2009.  Multiple investigations are underway, and it may be some time before a full account is available.  Meanwhile, the institutional funds that invested with Weavering are taking their write-downs, and in at least some cases are congratulating themselves on their diversification and the limited nature of the damage.  We tell the lurid story of Weavering’s collapse and its impact on various investors, some of them domiciled in Sweden.  We also highlight the potential impact of the Weavering story for the composition of boards of directors of hedge funds organized in the Caymans.

    Read Full Article …