The Hedge Fund Law Report

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

Articles By Topic

By Topic: Single Investor Hedge Funds

  • From Vol. 9 No.37 (Sep. 22, 2016)

    AIMA Survey Identifies Key Ways That Managers Align With Investors, Including Alternative Fee Structures, Skin in the Game and Customized Investment Solutions

    The Alternative Investment Management Association (AIMA) recently released a paper reviewing the nature of relationships between hedge fund managers and their investors. AIMA’s report explores a number of methods that managers are using to strengthen their relationships with investors, including by employing alternative fee structures, investing significant capital in their funds and offering customized investment solutions. This article examines these and other key takeaways from the report. For additional insight from AIMA, see “Basel III Raises Prime Brokerage Costs for Hedge Fund Managers” (Feb. 18, 2016); “Structures and Characteristics of Activist Alternative Investment Funds” (Mar. 12, 2015); and “Key Drivers of the Bifurcation of the Hedge Fund Industry Between Larger and Smaller Managers” (May 24, 2012).

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  • From Vol. 7 No.46 (Dec. 11, 2014)

    Schulte Partner Stephanie Breslow Addresses Gates, Side Pockets, Secondaries, Co-Investments, Redemption Suspensions, Funds of One and Fiduciary Duty (Part Two of Two)

    This is the second article in a two-part series covering a presentation by Stephanie R. Breslow at the Practising Law Institute’s annual hedge fund management program.  Breslow is a partner at Schulte Roth & Zabel LLP, co-head of its Investment Management Group and a member of the firm’s Executive Committee.  This article summarizes Breslow’s insights on: (1) compliance challenges for hedge fund managers with respect to the secondary market in hedge fund shares; (2) benefits of investor-level as opposed to fund-level gates; (3) managers’ increasing use of co-investment vehicles rather than side pockets; (4) updating fund provisions regarding calculating NAV after suspension of redemptions; (5) the benefits and drawbacks of funds of one; and (6) fiduciary considerations in the increasingly cautious and institutional current hedge fund industry environment.  The first article in this series discussed Breslow’s comments on gates, side pockets, synthetic side pockets and in-kind distributions, and how those tools evolved both before and during the credit crisis.  For coverage of Breslow’s presentations at PLI hedge fund management programs in prior years, see “Schulte Partner Stephanie Breslow Discusses Tools for Managing Hedge Fund Crises Caused by Liquidity Problems, Poor Performance or Regulatory Issues,” The Hedge Fund Law Report, Vol. 7, No. 1 (Jan. 9, 2014); “Schulte Partner Stephanie Breslow Discusses Hedge Fund Liquidity Management Tools in Practising Law Institute Seminar,” The Hedge Fund Law Report, Vol. 5, No. 43 (Nov. 15, 2012).

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  • From Vol. 7 No.36 (Sep. 25, 2014)

    Sidley Partners Discuss Evolving Hedge Fund Fee Structures, Seed Deal Terms, Single Investor Hedge Funds, Risk Aggregators, Expense Allocations, Co-Investments and Fund Liquidity (Part One of Two)

    Sidley Austin recently hosted its annual private funds event in New York City.  This article is the first in a two-part series covering that event.  This article highlights the most useful points made during a discussion entitled “Hedge Fund Terms and Trends,” featuring Sidley partners Benson R. Cohen, Janelle Ibeling, William D. Kerr and Christopher P. Lokken.  The partners addressed registered funds; challenges presented by single investor or single relationship hedge funds; use of and resistance by managers to risk aggregators; seed deal terms and trends; structures for aligning fund liquidity with investment duration; expense allocations; developments in fund structuring; and the impact of the Volcker Rule on hedge fund investments by bank aggregator platforms.  The discussion also provided a uniquely candid and relevant discussion of evolving fee structures and models for hedge funds and other entities used to offer alternative investment strategies.  Sidley sees and structures hedge funds and related vehicles across a wide range of strategies, sizes and geographies.  Accordingly, insight from Sidley partners on fees is generally relevant to hedge fund managers launching new products or justifying or amending fee structures on existing products.  The Hedge Fund Law Report previously covered Sidley’s 2013 private funds conference in three parts.  See Part One, Part Two and Part Three.

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  • From Vol. 7 No.1 (Jan. 9, 2014)

    Schulte Partner Stephanie Breslow Discusses Tools for Managing Hedge Fund Crises Caused by Liquidity Problems, Poor Performance or Regulatory Issues

    The Practising Law Institute’s (PLI) Hedge Fund Management 2013 program included a session entitled “Managing Hedge Funds in Crisis,” which was presented by Stephanie R. Breslow, a partner at Schulte Roth & Zabel LLP, co-head of the firm’s Investment Management Group and a member of its Executive Committee.  Breslow discussed the various tools that managers have at their disposal to address crises impacting their funds, such as a run on liquidity, and how those tools have changed over time, particularly after the 2008 financial crisis.  This article summarizes the key takeaways from her presentation.  For a general discussion of post-crisis liquidity and crisis management tools, see “Structuring, Valuation, Fee Calculation and Other Legal and Accounting Considerations in Connection with Hedge Fund General Redemption Provisions, Lock-Up Periods, Side Pockets, Gates, Redemption Suspensions and Special Purpose Vehicles,” The Hedge Fund Law Report, Vol. 3, No. 43 (Nov. 5, 2010); “What Are Hybrid Gates, and Should You Consider Them When Launching Your Next Hedge Fund?,” The Hedge Fund Law Report, Vol. 4, No. 6 (Feb. 18, 2011); and “IOSCO Report Discusses Appropriate Use and Disclosure of Hedge Fund Redemption Suspensions, Gates and Side Pockets,” The Hedge Fund Law Report, Vol. 4, No. 10 (Mar. 18, 2011).

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  • From Vol. 6 No.24 (Jun. 13, 2013)

    RCA Symposium Clarifies Current Market Practice on Side Letters, Conflicts of Interest, Insider Trading Investigations, Whistleblowers, FATCA and Use of Managed Accounts Versus Funds of One (Part One of Two)

    On April 18, 2013, the Regulatory Compliance Association held its Regulation, Operations & Compliance 2013 Symposium, at which industry leaders and regulators offered their perspectives on critical issues facing hedge fund managers and investors.  The Hedge Fund Law Report is publishing a two-part series of articles summarizing salient points from panel discussions held during the Symposium.  This article, the first in the series, discusses regulatory and operational challenges implicated by side letters, including dealing with requests for enhanced liquidity and transparency as well as the evaluation of requests for most favored nation provisions.  This article also addresses how hedge fund managers are using funds of one and managed accounts, and the benefits and burdens of each.  The second installment will cover techniques and strategies regulators and prosecutors are using to investigate insider trading; how managers should address high-priority conflicts of interest; the SEC’s whistleblower program; and compliance with the Foreign Account Tax Compliance Act.  For articles covering speeches made and topics discussed during the Symposium, see “SEC Commissioner Aguilar Discusses Insider Trading by Hedge Fund Managers, Valuation and Other Examination and Enforcement Pressure Points,” The Hedge Fund Law Report, Vol. 6, No. 18 (May 2, 2013); and “OCIE Director Bowden Identifies Five Key Lessons for Hedge Fund Managers from Recent Presence Examinations,” The Hedge Fund Law Report, Vol. 6, No. 21 (May 23, 2013).

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  • 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.

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  • From Vol. 3 No.16 (Apr. 23, 2010)

    Single Investor Hedge Funds Offer the Benefits of Managed Accounts and Additional Tax and Other Advantages for Hedge Fund Managers and Investors

    Managed accounts started 2010 as the ostensible antidote to many of the more egregious evils experienced by hedge fund investors over the last two years.  Managed accounts offer transparency, liquidity, control and risk management, whereas during the credit crisis, many hedge funds and other investment vehicles offered opacity, gates, lack of control and increased risk.  While the case for managed accounts is not without valid objections – including administrative cost, allocation issues and other issues discussed more fully below – managed accounts are an increasingly popular method of accessing hedge fund strategies and managers while avoiding the downsides of commingled funds.  According to a February 2010 survey conducted by Preqin, the alternative investment data provider, 16 percent of institutional investors have a current allocation to managed accounts and a further 23 percent of institutional investors are considering an initial allocation to a managed account during 2010.  Similarly, 65 percent of fund of funds managers surveyed by Preqin either operate a managed account currently or are considering doing so during 2010.  Preqin also found that larger investors are more likely to demand, and larger managers are more likely to offer, managed accounts, and that the proportion of fund of funds managers operating managed accounts is greatest in North America (60 percent), followed by Asia and rest of world (including Hong Kong, Singapore, Japan and Israel, at 44 percent) then Europe (40 percent).  Recently, various hedge fund managers have been exploring an alternative structure that effectuates many of the goals of managed accounts, while offering a number of additional benefits and avoiding at least one of the chief downsides.  That alternative structure is the single investor hedge fund – as the name implies, a hedge fund with one outside investor (in addition to the manager’s investment).  To assist hedge fund managers and investors in evaluating whether a single investor hedge fund may be an appropriate alternative to a traditional hedge fund, on the one hand, or a managed account, on the other hand, this article discusses: the definition of a managed account; the six chief benefits and eight primary burdens of managed accounts versus hedge funds; the definition of a single investor hedge fund; the six chief benefits of single investor hedge funds over managed accounts; and the two primary downsides of single investor hedge funds versus managed accounts.

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