The Hedge Fund Law Report

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

Articles By Topic

By Topic: Mutual Funds

  • From Vol. 5 No.24 (Jun. 14, 2012)

    Davis Polk “Hedge Funds in the Current Environment” Event Focuses on Establishing Registered Alternative Funds, Hedge Fund Manager M&A and SEC Examination Priorities

    On May 11, 2012, the New York City Bar Association held its annual “Hedge Funds in the Current Environment” program co-hosted by law firm Davis Polk & Wardwell LLP.  Speakers at this event addressed various topics of current relevance to the hedge fund industry, including: SEC examination priorities, such as insider trading, trade reviews and asset verification; establishing registered alternative funds; trends in hedge fund manager mergers and acquisitions; and hedge fund advertising after passage of the Jumpstart Our Businesses Startups (JOBS) Act.  Notably, Norm Champ, Deputy Director of the Office of Compliance Inspections and Examinations with the SEC, provided an up-to-date view of the SEC’s examination priorities in relation to hedge funds and their managers.  This article summarizes the key points discussed at the conference relating to each of the foregoing topics.

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  • From Vol. 4 No.44 (Dec. 8, 2011)

    SEI Report Describes the Growth Opportunity for Hedge Fund Managers in Regulated Alternative Funds

    In November 2011, SEI and Strategic Insights released a report highlighting the growth of offerings of alternative investment strategies in regulated products such as Undertakings for Collective Investment in Transferable Securities (UCITS) and mutual funds.  See “The Implications of UCITS IV Requirements for Asset Management Functions,” The Hedge Fund Law Report, Vol. 4, No. 36 (Oct. 13, 2011).  This article outlines the main findings in the report and its implications for hedge fund structuring, marketing and investments.

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  • From Vol. 2 No.49 (Dec. 10, 2009)

    Can Mutual Funds Rely on the Recent T. Rowe Price No-Action Letter to Invest in Hedge Funds?

    On October 7, 2009, T. Rowe Price Associates, Inc., a registered investment adviser to, primarily, registered investment companies (i.e., mutual funds), received a no-action letter (NAL) from the SEC.  The NAL stated that the SEC would not take enforcement action under Section 17(a) or 17(c) of the Investment Company Act of 1940, as amended (the 1940 Act), or Rule 17d-1 thereunder, against T. Rowe Price, the T. Rowe Price Funds (Price Funds) or certain accounts managed by T. Rowe Price (Accounts) if: (1) T. Rowe Price caused certain mutual funds that it advises to contribute cash or securities to a newly created private fund (that is, a fund excepted from the definition of “investment company” under either Section 3(c)(1) or 3(c)(7) of the 1940 Act); (2) the private fund in turn used the cash or securities as collateral for a loan under the U.S. Treasury Department’s Term Asset-Backed Securities Loan Facility (TALF); and (3) the private fund used its own assets and the TALF loan to purchase eligible securities (including various asset-backed securities).  T. Rowe Price sought no-action relief with respect to this arrangement for two reasons.  First, it perceived an interesting and comparatively low-risk investment opportunity in asset-backed securities purchased in part with TALF loan proceeds.  Second, none of its mutual funds individually had or could acquire eligible securities (as defined by the TALF) with a value sufficient to collateralize a TALF loan (such loans have a minimum denomination of $10 million), but collectively the mutual funds had or could acquire a sufficient value of eligible securities.  For hedge fund managers, the T. Rowe Price NAL is potentially quite interesting because, at a certain level of generality, it offers no-action relief to a registered investment adviser seeking to cause its advised mutual funds to invest in a private fund.  However, the language of the NAL and the fact pattern with respect to which the SEC granted no-action relief may be too specific to have any viable precedential value for mutual fund managers considering investing in hedge funds.  In light of the importance of any authority even suggesting the possibility that mutual funds may surmount the various obstacles traditionally understood to stand in the way of investments in hedge funds, this article examines: the mechanics of the TALF program; the structure of the proposed investment outlined by T. Rowe Price in its incoming letter; the legal issues raised by the proposed structure; the primary obstacles faced by mutual funds contemplating investments in hedge funds, including valuation and affiliated transaction issues; and the likely impact of the NAL on the mutual fund and hedge fund industries, and the interaction between the two industries.

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  • From Vol. 2 No.38 (Sep. 24, 2009)

    In Light of Convergence of Hedge Fund Strategies and Mutual Fund Structures, Mutual Fund Advisory Fee Case before U.S. Supreme Court May Affect Future Profitability of Hedge Fund Industry

    Recent decisions regarding mutual funds, particularly with regard to advisory fee disputes, have taken on heightened importance for the hedge fund community.  This is because of the growing convergence between hedge fund strategies and mutual fund structures.  As previously reported in The Hedge Fund Law Report, investment managers who manage both hedge and mutual funds may have, for somewhat counterintuitive reasons (i.e., reasons other than short term fee considerations), an incentive to favor mutual funds.  See “New Study Offers Surprising Findings on the Incentives Created by Concurrent Management of Hedge and Mutual Funds,” The Hedge Fund Law Report, Vol. 2, No. 23 (Jun. 10, 2009).  Such managers may use the mutual funds to “advertise” their investing prowess to the public and potential hedge fund investors because, with respect to the mutual fund, they have less onerous restrictions with respect to communications with the public, investor solicitations and performance advertising.  Successful mutual fund managers sometimes capitalize on their success by launching hedge funds following similar strategies, but with higher total fees.  Also, an increasing number of mutual funds are employing hedge fund strategies.  As a consequence of this convergence trend, a case now before the U.S. Supreme Court dealing with advisory fees in the mutual fund context has significance for the hedge fund community.  We detail the substantive and procedural history of that case, including the most recent decision from the Seventh Circuit and a dissent from the redoubtable Judge Posner (that could foreshadow the outcome in the U.S. Supreme Court).  We also summarize the arguments advanced by SIFMA, the Independent Directors Council and the Investment Company Institute in amicus briefs.

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  • From Vol. 2 No.23 (Jun. 10, 2009)

    New Study Offers Surprising Findings on the Incentives Created by Concurrent Management of Hedge and Mutual Funds

    For some time, conventional wisdom has held that where an investment manager manages hedge and mutual funds simultaneously, the manager will have an incentive to favor the hedge fund with better investment opportunities, and to direct the less interesting opportunities to the mutual fund.  The source of this supposed favoritism was fees: since the total fees paid by the hedge fund to the manager are higher than the fees paid by the mutual fund, the manager would stand to collect greater total fees by directing the better opportunities to the hedge fund.  The manager’s fiduciary duty to all of its funds was understood to mitigate this incentive – but not to eliminate it, especially in the closer, harder-to-monitor cases.  However, a new study upends the conventional wisdom.  We detail the findings from that study and what it may mean for hedge fund managers.  We also discuss issues arising from the management by one hedge fund manager of multiple hedge funds with different investor bases – one consisting of outside investors and the other consisting of principals and employees of the manager.

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  • From Vol. 2 No.15 (Apr. 16, 2009)

    Hedge Fund Managers Launching Mutual Funds in an Effort to Stay a Step Ahead of Regulatory Convergence

    Although the term “hedge fund” has no statutory or common law definition, historically hedge funds have been defined in large part by what they are not: mutual funds.  Unlike mutual funds, hedge funds have been exempt from the definition of “investment company” under the Investment Company Act of 1940, and unlike mutual fund advisers, hedge fund advisers have not been required to register under the Investment Advisers Act of 1940.  Free from many regulatory restrictions that bind registered funds and advisers, the hedge fund format has been understood as a blank canvas on which a creative manager can realize his or her full investment potential; and the historical returns of some managers have borne out that understanding.  However, in a potent sign of the extent to which the challenging economic climate has changed the hedge fund industry, hedge funds managers are now engaging in a move formerly considered unthinkable – they are launching mutual funds.  While there are various reasons for this trend, two macro variables are largely responsible.  First, the negative feedback loop of poor performance and redemptions that has virtually halved the capital base of the industry.  Without capital there are no hedge funds – or mutual funds – and so hedge fund managers are looking for new sources of capital to fill the holes left by redemptions, even if that new capital generates lower fees.  Second, the increasing likelihood, perhaps inevitability, of regulatory convergence between hedge funds and mutual funds, and their respective managers.  Bills presently before Congress would subject hedge funds and their managers to many of the regulations currently applicable to mutual funds and their managers.  If such bills pass – and the consensus view is that they will, though likely with modifications from their current forms – then the regulatory playing field will be leveled and the legal advantages of running a hedge fund over a mutual fund will largely disappear.  In this sense, launching a mutual fund constitutes a recognition by a hedge fund manager of what may well be a legal fait accompli, and an effort to capitalize (from a marketing perspective) on the “aura” of being a hedge fund manager while that still means something in the retail imagination.  We discuss the convergence trend, the benefits and burdens to hedge fund managers of running a mutual fund, which hedge fund strategies lend themselves to mutual fund structures, allocation and marketing considerations and competition issues.

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