The Hedge Fund Law Report

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

Articles By Topic

By Topic: Investment Consultants

  • From Vol. 10 No.13 (Mar. 30, 2017)

    Deutsche Bank Alternative Investment Survey Explores Hedge Fund Asset Flow Trends; Highlights Greater Allocator Interest in Alternative Beta Strategies (Part One of Two)

    Deutsche Bank Global Prime Finance (DB) has released the results of its 15th annual Alternative Investment Survey. The study is compiled from the responses of 460 global allocators representing nearly $2 trillion in hedge fund assets. This article, the first in a two-part series, covers the portions of the study concerning trends in asset flows, including impediments and preferences among allocators. The second article will detail the survey’s results concerning hedge fund fees and fee negotiations, as well as investor allocation preferences. For coverage of previous editions of DB’s annual survey, see our two-part coverage of the 2016 Survey: Part One (Mar. 17, 2016); and Part Two (Mar. 24, 2016); our two-part coverage of the 2015 Survey: Part One (May 21, 2015); and Part Two (Jun. 4, 2015); and our coverage of the 2013 Survey: “Deutsche Bank Survey Describes the Contours of the Nontraditional Hedge Fund Product Market: Investor Appetite, Performance, Marketing, Fees and More” (Jan. 23, 2014). 

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  • From Vol. 9 No.23 (Jun. 9, 2016)

    Hedge Fund Managers Must Ensure That Insider Trading Compliance Policies and Procedures Cover Third-Party Consultants

    The Investment Advisers Act of 1940 requires advisers to have written policies and procedures to prevent the misuse of material nonpublic information (MNPI) by the adviser and its associated persons. A recent SEC settlement order clarifies that an investment adviser must ensure that its policies and procedures extend to reach third-party consultants. Unbeknownst to the investment adviser in this case and its compliance department, an outside consultant that provided investment research and recommendations on biotech companies to the adviser’s portfolio managers also served as a director of some of those very companies. This article summarizes the facts that led up to the SEC’s allegations, alleged violations by the investment adviser and the settlement. For discussion of an SEC enforcement action involving the misuse of MNPI by an investment consultant, see “SEC Action Demonstrates the Potential Risks of Insider Trading by Investment Consultants Hired by Private Fund Managers” (Mar. 29, 2012). For other SEC actions involving failure to adopt appropriate policies and procedures, see “Steps All Investment Advisers – and Their Compliance Officers – Should Take in Light of the SEC’s Risk Alert on Outsourced CCOs (Part Two of Two)” (Mar. 10, 2016). 

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  • From Vol. 7 No.31 (Aug. 21, 2014)

    OCIE Letter Foreshadows Examination Activity Focused on Municipal Advisors

    On August 19, 2014, the SEC’s Office of Compliance Inspections and Examinations (OCIE) published a letter announcing its intention to examine certain municipal advisors (MAs) that must register with the SEC between July 1 and October 31, 2014 and that are not registered with FINRA.  In its letter addressed to MA senior executives and principals, OCIE explained that it will be examining a “significant percentage” of the newly registered MAs through a National Exam Program (NEP).  MAs must register with the SEC under Section 975 of Dodd-Frank, which amended Section 15B of the Securities Exchange Act of 1934, and they owe fiduciary duties to the municipal pension funds that they advise.  Hedge fund managers should understand the SEC’s agenda concerning the upcoming MA examinations because certain pension fund advisers – critical gatekeepers between hedge fund managers and the considerable volume of retirement assets available for investment – may be deemed to be MAs and therefore scrutinized as part of NEP’s initiative.  See “Getting to Know the Gatekeepers: How Hedge Fund Managers Can Interface with Investment Consultants to Access Institutional Capital (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 27 (Jul. 11, 2013).  In turn, hedge fund managers should understand the total range of concerns bearing on the entities to which they market, or on the intermediaries serving those entities; to the extent pension consultants are under increased examination pressure, managers’ marketing efforts, other things being equal, are more likely to be successful if they take those pressures into account.

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  • From Vol. 7 No.23 (Jun. 13, 2014)

    Pension Plan Gatekeepers Increasingly Serving as Competitors to Alternative Investment Managers

    On May 21, 2014, Rep. George Miller, Senior Democratic Member of the House Committee on Education and the Workforce, sent a letter to Labor Department Secretary Thomas Perez expressing concerns about a “growing trend” in which pension consultants are “recommending” themselves to manage the assets of their pension plan clients.  See also “Getting to Know the Gatekeepers: How Hedge Fund Managers Can Interface with Investment Consultants to Access Institutional Capital (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 28 (Jul. 18, 2013).

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  • From Vol. 6 No.28 (Jul. 18, 2013)

    Getting to Know the Gatekeepers: How Hedge Fund Managers Can Interface with Investment Consultants to Access Institutional Capital (Part Two of Two)

    Investment consultants play an important and growing role in the investment decision-making processes of institutional investors.  See “Goldman Prime Brokerage Survey Relays the Views of Institutional Investors on Hedge Fund Fees, Manager Selection, Due Diligence, Return Expectations, Liquidity, Managed Accounts, UCITS and Alternative Mutual Funds,” The Hedge Fund Law Report, Vol. 6, No. 25 (Jun. 20, 2013).  Therefore, hedge fund managers that seek institutional investors for their hedge funds must understand who investment consultants are, how they operate and how they think, as well as the legal risks and benefits of working with consultants.  This article, the second in a two-part series, analyzes those legal risks and benefits, focusing in particular on pay to play, lobbying, general solicitation, advertising, fiduciary duty, conflicts of interest and related concerns.  The first article in this series provided an overview of the services and service models employed by consultants, discussed how consultants are compensated and explored how consultants think about manager selection.  See “Getting to Know the Gatekeepers: How Hedge Fund Managers Can Interface with Investment Consultants to Access Institutional Capital (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 27 (Jul. 11, 2013).

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  • From Vol. 6 No.27 (Jul. 11, 2013)

    Getting to Know the Gatekeepers: How Hedge Fund Managers Can Interface with Investment Consultants to Access Institutional Capital (Part One of Two)

    If you as a hedge fund manager want to raise and retain institutional investor capital, you have to make (or remain) friends with investment consultants.  Such consultants are playing an increasingly central role in the allocation decisions of institutional investors with respect to hedge funds, for at least five reasons.  First, funding gaps, demographic shifts and other factors have increased the need among many institutions to generate consistent alpha; the same dynamics have accentuated the stakes of making an allocation mistake.  Second, consultants are usurping much of the advisory terrain previously occupied by funds of funds because of concerns regarding the latters’ fees and performance shortcomings.  See “SEI Report Highlights Challenges Faced by Fund of Hedge Funds Industry and Recommends Improvements,” The Hedge Fund Law Report, Vol. 5, No. 47 (Dec. 13, 2012).  Third, the due diligence process and allocation decisions have become more multifaceted, focusing as much (or more) on operational issues than on performance alone.  See “What Should Hedge Fund Managers Expect When ERISA Plans Conduct Due Diligence on and Negotiate for Investments in Their Funds?,” The Hedge Fund Law Report, Vol. 6, No. 25 (Jun. 20, 2013).  Fourth, the pace of regulatory change and new fund launches make it difficult for institutions to keep up with due diligence best practices or investment options.  See “Legal and Operational Due Diligence Best Practices for Hedge Fund Investors,” The Hedge Fund Law Report, Vol. 5, No. 1 (Jan. 5, 2012).  Fifth, the growing use of investment consultants by institutions has made any particular institution less inclined to go it alone.  In short, investment consultants are fast becoming the standard of care for institutional investors allocating capital to private funds.  As such, they effectively serve as “gatekeepers” – in the commonly heard phrase – to the deepest pool of capital available to hedge fund managers.  In light of the centrality of investment consultants to the world of private fund allocations, this article offers a tutorial to hedge fund managers on what matters to consultants.  To do so, this article – the first in a two-part series – memorializes our interviews with a range of leading consultants on the topics they consider most important.  In particular, this article provides an overview of services and service models employed by investment consultants; discusses how consultants staff engagements and how they are compensated; explores how consultants think about manager selection; and details how managers can disclose information required by consultants while protecting such information.  The second article in this series will focus on the legal and regulatory risks faced by hedge fund managers in working with consultants, and will offer suggestions on mitigating those risks.

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  • From Vol. 5 No.13 (Mar. 29, 2012)

    Recently-Filed SEC Action Demonstrates the Potential Risks of Insider Trading by Investment Consultants Hired by Private Fund Managers

    Private fund managers, including hedge fund managers, often hire investment consultants to help evaluate investments; analyze an investment target company’s operations, management and financial condition; offer strategic and structuring advice; and provide related services.  To provide value, such consultants typically request and receive deep access to confidential target company data.  The company typically grants such access under the terms of a confidentiality agreement between the company and the consultant, or among the company, the consultant and the private fund manager.  Typically, the primary purpose of such confidentiality agreements is to prevent confidential company information from reaching a competitor or from being used by the consultant on behalf of a competitor.  A secondary purpose of such agreements is to prevent insider trading by “temporary insiders” or their tippees, or Regulation FD violations by the company.  However, an enforcement action recently filed by the SEC suggests that confidentiality agreements, standing alone, may not be sufficient to prohibit insider trading by investment consultants.  While the private fund manager involved was not charged, the charges against the manager’s consultant reflect adversely on the manager.  The charges suggest, for example, that the manager did not take adequate precautions to control the conduct of the consultant.  Given the radioactivity of insider trading charges in the current enforcement environment, risk aversion with respect to insider trading is prudent business.  This article discusses the SEC’s factual and legal allegations in the matter, as well as the consultant’s proposed settlement agreement.  This article also details four steps that private fund managers may take to prevent insider trading by their investment consultants.

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  • From Vol. 4 No.11 (Apr. 1, 2011)

    Survey by SEI and Greenwich Associates Identifies the Primary Decision Factors and Concerns of Institutional Investors When Investing in Hedge Funds

    A survey of 97 institutional investors and 14 investment consultants conducted by SEI Knowledge Partnership in collaboration with Greenwich Associates last October, and released earlier this year, identifies the hierarchy of considerations and concerns of institutional investors when investing in hedge funds.  One notable finding of the survey – especially for a publication, like the HFLR, focused on regulation – is the view of most institutional investors with respect to regulation.  That view is discussed in this article.  In addition, this article discusses the survey’s findings on the following topics: statistics with respect to hedge fund returns, assets under management, launches and liquidations during the last three years; plans with respect to hedge fund allocations during 2011; objectives of institutional investors when investing in hedge funds; most significant challenges in hedge fund investing; experience with and perceptions of liquidity; the 16 factors that investors consider most important when selecting among managers; four key takeaways for hedge fund managers from the survey findings; breakdown of hedge fund allocations by institutional investor type; trends with respect to fees; the role of consultants; the success rate of negotiations on liquidity terms; and trends with respect to the resources dedicated by institutional investors and consultants to hedge fund due diligence and monitoring.

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  • From Vol. 3 No.4 (Jan. 27, 2010)

    Hedge Fund Research and Advisory Firm Aksia LLC Sues Two Former Employees for Misappropriation and Destruction of Confidential Business Information

    Aksia LLC is a hedge fund advisory business that provides strategy and portfolio-level research and advisory services to institutional investors that invest in hedge funds.  Defendants Sarah Cole and Corissa Mastropieri worked for Aksia’s “Americas advisory services team” servicing institutional clients and developing new business.  Aksia’s complaint alleges that, in connection with the defendants’ move to work for an Aksia competitor in London, the defendants solicited each other to leave Aksia, stole confidential business information and other company property, tampered with company records and interfered with Aksia’s relations with its clients.  The complaint illustrates how Aksia used forensic investigations of the defendants’ computers to document the defendants’ alleged preparation for their move to an Aksia competitor.  In addition to money damages, Aksia seeks, among other things, to enjoin the defendants from using the confidential information they allegedly took and from working for that competitor.  This article summarizes Aksia’s allegations and the relief it is seeking.

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  • From Vol. 2 No.30 (Jul. 29, 2009)

    Second Circuit Holds that Recommendations by Hennessee Group that Clients Invest in Bayou Hedge Funds Did Not Violate Federal Securities Laws

    On July 14, 2009, the Second Circuit affirmed the dismissal of South Cherry Street, LLC’s complaint which alleged that hedge fund consultant Hennessee Group LLC (i) violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and (ii) breached an oral contract to conduct suitable due diligence by recommending that its clients invest in the “Bayou” group of funds, which turned out to be part of a Ponzi scheme.  The Second Circuit determined that the alleged oral contract was unenforceable by reason of the New York statute of frauds because it could not be fully performed within one year.  It also determined that South Cherry failed to allege sufficient facts to show that defendants acted with the requisite intent to sustain a claim for securities fraud under Section 10(b) of the Exchange Act.  We summarize the court’s findings and reasoning and its potential impact on hedge fund investors and the consultants who assist them in selecting hedge fund investments.

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