The Hedge Fund Law Report

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By Topic: Pension Funds

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

    K&L Gates Program Warns of Public Disclosure Risks Associated With Accepting State Public Pensions As Investors and Advises on How to Mitigate Them (Part Two of Two)

    Many private fund advisers perceive the investments from public pension plans as highly desirable, particularly in a difficult fundraising environment. See “How Emerging Hedge Fund Managers Can Raise Capital in a Challenging Market Without Overstepping Legal Bounds” (Aug. 4, 2016). While the benefits are plentiful, it is important for fund managers to be mindful of federal, state and local regulations surrounding these arrangements. Failure to do so could lead to potential violations of statutory “pay to play” rules, as well as the inadvertent disclosure of proprietary fund information under public record requests and freedom of information (FOI) laws. To apprise fund managers of these issues and help them prepare accordingly, K&L Gates presented a recent program featuring insights from Eric J. Smith, managing director and deputy general counsel at PineBridge Investments, as well as Cary J. Meer and Ruth E. Delaney, partner and associate, respectively, at K&L Gates. This second article in a two-part series covers FOI laws pursuant to which funds could face disclosure issues, as well as ways to protect that information. The first article detailed federal and state pay to play regulations, including restrictions on political contributions and gifts and entertainment. For more on how fund managers can comply with pay to play restrictions, see “The SEC’s Pay to Play Rule Is Here to Stay: Tips for Hedge Fund Managers to Avoid Liability” (Oct. 8, 2015); “Four Pay to Play Traps for Hedge Fund Managers, and How to Avoid Them” (Feb. 5, 2015); and “How Can Hedge Fund Managers Participate in the Political Process Without Violating Pay to Play Regulations at the Federal, State, Municipal or Fund Level?” (Oct. 6, 2011).

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  • From Vol. 10 No.12 (Mar. 23, 2017)

    K&L Gates Program Addresses State and Local Lobbying; Pay to Play; and Gifts and Entertainment Limitations (Part One of Two)

    Private fund advisers that seek investments from public pension plans enter a minefield of federal, state and local rules, and those that think that compliance with the “pay to play” rules under the Investment Advisers Act of 1940 affords sufficient protection may be sadly mistaken. States, municipalities and even individual government pension plans have a wide array of rules regarding lobbying, political contributions and gifts and entertainment. Further, sensitive information provided to public pension plans in the course of the investment management relationship may be subject to disclosure under public records and freedom of information (FOI) laws. A recent program presented by K&L Gates offered valuable insights into those state and local rules. The program featured Cary J. Meer and Ruth E. Delaney, partner and associate, respectively, at K&L Gates; and Eric J. Smith, managing director and deputy general counsel at PineBridge Investments. This article, the first in a two-part series, covers the portions of the program devoted to lobbyist regulation; political contributions; and gifts and entertainment. The second article will discuss state “sunshine” and FOI laws. For additional insight from Meer, see “How Hedge Fund Managers Can Prepare for SEC Remote Examinations (Part Two of Two)” (May 19, 2016); “Practical Guidance for Hedge Fund Managers on Raising Capital in Australia, the Middle East and Asia” (Oct. 30, 2014); and “Impact of CFTC Harmonization Rules on Alternative Mutual Funds and Other Registered Investment Companies” (Nov. 1, 2013).

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  • From Vol. 9 No.37 (Sep. 22, 2016)

    What U.S. and Other Non-Swiss Portfolio Managers Need to Know About Managing Assets of Swiss Occupational Benefit Plans

    Swiss occupational benefit plans – a pillar of the Swiss social security system – are increasingly outsourcing portfolio management responsibilities to investment professionals, including “foreign” (i.e., non-Swiss) managers, in response to the growing complexity of investment management. In a guest article, Stephanie Comtesse, counsel at Bär & Karrer, provides an overview of Swiss occupational benefit plans; how management of these plans by foreign service providers fits within existing and proposed Swiss legislation; and additional legal considerations caused by the outsourcing of these responsibilities. For coverage of additional Swiss regulations, see “New Swiss Regulations Require Appointment of Local Agents and Increased Disclosure in Hedge Fund Documents” (May 14, 2015); “Swiss Hedge Fund Marketing Regulations, BEA Forms and Form ADV Updates” (Mar. 5, 2015); and “The Changing Face of Alternative Asset Management in Switzerland” (Feb. 2, 2012). For analysis of similar outsourcing by U.S. pension plans, see our three-part series entitled “Understanding U.S. Public Pension Plan Delegation of Investment Decision-Making to Internal and External Investment Managers”: Part One (Jan. 23, 2014); Part Two (Feb. 6, 2014); and Part Three (Feb. 21, 2014).

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  • From Vol. 9 No.28 (Jul. 14, 2016)

    Dechert Panel Discusses Recent Hedge Fund Fee and Liquidity Terms, the Growth of Direct Lending and Demands of Institutional Investors 

    A recent program sponsored by Dechert offered an overview of the current hedge fund landscape, focusing on fee and liquidity terms, the growth of direct lending, prime brokerage and institutional investors’ perspectives on alternative investments. The program featured John D’Agostino, a managing director at DMS Offshore Investment Services Ltd., and Dechert partners Matthew K. Kerfoot, David A. Vaughan, Karl J. Paulson Egbert and Timothy Spangler. This article highlights the panelists’ primary insights. For further insight from Kerfoot, see “Dechert Webinar Highlights Key Deal Points and Tactics in Negotiations Between Hedge Fund Managers and Futures Commission Merchants Regarding Cleared Derivative Agreements” (Apr. 18, 2013). For additional commentary from Vaughan, see “A Practical Comparison of Reporting Under AIFMD Versus Form PF” (Oct. 30, 2014). For further remarks from Egbert, see “Capital-Raising Opportunities, Regulatory Hurdles and Cultural Challenges Faced by Hedge Fund Managers in China and the Middle East” (Jun. 23, 2016).

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  • From Vol. 9 No.4 (Jan. 28, 2016)

    SEC Starts Year With Pay to Play Penalties

    A wide variety of both specific and general rules prohibit the making of political contributions in exchange for government business. See “Four Pay to Play Traps for Hedge Fund Managers, and How to Avoid Them” (Feb. 5, 2015). In the hedge fund space, pay to play schemes often involve making political contributions to secure investment allocations from public pensions or other public funds. Rule 206(4)-5 under the Investment Advisers Act of 1940 was adopted to prevent precisely such misconduct by investment advisers. See “The SEC’s Pay to Play Rule Is Here to Stay: Tips for Hedge Fund Managers to Avoid Liability” (Oct. 8, 2015). Pay to play charges can also be brought under the general antifraud provisions of the federal securities laws. The SEC recently charged State Street Bank and Trust (SSBT), along with a senior executive and others, with violating the antifraud provisions of the securities laws in connection with a scheme to win lucrative pension business from the State of Ohio by allegedly funneling cash to the Ohio Deputy Treasurer and campaign contributions to the Ohio State Treasurer. This article summarizes the alleged pay to play scheme and the outcomes of the SEC enforcement actions, as well as the SEC’s determination on SSBT’s parent’s no-action request for confirmation that it would not be deemed an “ineligible issuer” under Rule 405 of the Securities Act of 1933 by reason of the enforcement action.

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  • From Vol. 8 No.44 (Nov. 12, 2015)

    Class Action Lawsuit May Affect Retirement Plan Allocations to Hedge Funds

    Following the 2008 financial crisis, pension managers looked to hedge funds as one way of making up performance losses.  That approach may have backfired for one large corporation whose alternative pension investments stand accused of poor performance.  A former employee is the named plaintiff and class representative in a putative class action against the corporate committees and their members that were responsible for the corporation’s pension investments.  The suit charges that, by investing heavily in “risky and high-cost hedge funds and private equity investments,” and by eschewing more widely accepted pension allocation models, the defendants breached their fiduciary duties to the pension plans, which sustained “massive losses and enormous excess fees.”  This article summarizes the key allegations against the ERISA fiduciaries who elected to invest in hedge funds and other alternative investments.  For more on ERISA fiduciary duties, see the first two parts of our series entitled “Happily Ever After? – Investment Funds that Live with ERISA, For Better and For Worse”: Part One, Vol. 7, No. 33 (Sep. 4, 2014); and Part Two, Vol. 7, No. 34 (Sep. 11, 2014).

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  • From Vol. 8 No.39 (Oct. 8, 2015)

    The SEC’s Pay to Play Rule Is Here to Stay: Tips for Hedge Fund Managers to Avoid Liability

    A federal appeals court recently rejected a challenge to the SEC’s pay to play rule.  Adopted by the SEC to prevent “pay to play” arrangements between public officials and investment advisory firms, the rule restricts certain registered investment advisers from making political contributions to officials with some level of control over the investment decision-making of public pension plans and other government entities.  Last week, the U.S. Court of Appeals for the D.C. Circuit threw out a lawsuit seeking to set aside the rule.  This latest development has put a spotlight on the pay to play rule, which is extremely broad and can be confusing in its application.  With the 2016 elections quickly approaching, it is important that affected firms re-examine their efforts to comply with the rule – especially given the heightened level of SEC scrutiny in this area, as indicated by recent enforcement activity.  In a guest article, Justin V. Shur and Gerald P. Meyer, a partner and an associate, respectively, at Molo Lamken, discuss the facts and findings of the case; analyze liability under the pay to play rule; clarify penalties for non-compliance; and offer tips to prevent and mitigate violations.  For additional insight from Shur, see “FCPA Considerations for the Private Fund Industry: An Interview with Former Federal Prosecutor Justin Shur,” The Hedge Fund Law Report, Vol. 7, No. 20 (May 23, 2014); “How Private Fund Managers Can Manage FCPA Risks When Investing in Emerging Markets,” The Hedge Fund Law Report, Vol. 6, No. 2 (Jan. 10, 2013); and “Political Intelligence Firms and the STOCK Act: How Hedge Fund Managers Can Avoid Potential Pitfalls,” The Hedge Fund Law Report, Vol. 5, No. 14 (Apr. 5, 2012).

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  • From Vol. 8 No.31 (Aug. 6, 2015)

    Practical Consequences of the Use of Benchmarks to Measure Hedge Fund Performance by Pension Funds and Institutional Investors (Part Two of Two)

    Hedge funds seek absolute returns and, unlike mutual funds, are not legally required to identify a benchmark or report performance against certain indices.  However, as pension funds and other institutional investors evaluate hedge funds’ performance, either explicitly or implicitly, against benchmarks, hedge fund managers themselves may also provide benchmarked performance information.  The first article in our two-part series explored the extent to which, and the means by which, pension funds and institutional investors employ benchmarks in their assessments of hedge fund performance.  This article examines the practical consequences of subjecting hedge funds to performance benchmarks, including whether this practice could cause hedge funds to shift away from their traditional absolute returns-based performance emphasis, toward a focus on benchmarked results; whether hedge fund managers have themselves been influenced to publish benchmarked performance information and the implications of doing so; and the parameters surrounding the use of benchmarks for hedge fund performance evaluation.  For discussion of another practice of measuring hedge fund performance, see “Legal Risks for Hedge Fund Managers of Using Target Returns (Part Two of Two),” The Hedge Fund Law Report, Vol. 8, No. 17 (Apr. 30, 2015).

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  • From Vol. 8 No.31 (Aug. 6, 2015)

    State Pension Fund Study Challenges Assumptions Regarding Active Management and Alternative Investments

    Hedge fund managers and other alternative investment managers frequently target state pension funds for investment, with the understanding that, in exchange for the fees paid by those pension funds, the hedge funds or alternative investments will deliver superior returns.  However, in its study of state pension funds with fiscal years ending June 30, 2014, the Maryland Public Policy Institute challenges that assumption.  This article summarizes the results of the study.  For more about pension plan investments, see “Pension Plan Gatekeepers Increasingly Serving as Competitors to Alternative Investment Managers,” The Hedge Fund Law Report, Vol. 7, No. 23 (Jun. 13, 2014); and “Understanding U.S. Public Pension Plan Delegation of Investment Decision-Making to Internal and External Investment Managers (Part Three of Three),” The Hedge Fund Law Report, Vol. 7, No. 7 (Feb. 21, 2014).

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  • From Vol. 8 No.24 (Jun. 18, 2015)

    Public Pension Plan Investments May Increase the Risk That Hedge Fund Managers May Breach Fiduciary Duties

    Pension funds are significant sources of assets for private fund managers.  Hedge fund managers seeking investments from pension funds face a number of practical and legal concerns – including the possible need to register as a municipal advisor, the complex ERISA regime, pay to play rules and dealing with pension consultants – that may not otherwise arise with respect to individuals or other types of institutional investors.  In addition, as exemplified by a recent SEC order against an investment adviser and two of its principals, public pension plan investors may increase the range of responsibilities for hedge fund managers that, if not adequately discharged, can lead to breach of those managers’ fiduciary duties, with potential serious consequences.  In the order, the SEC claims that the respondents engaged in fraudulent conduct by soliciting several state public pensions to invest in one of their alternative investment fund of funds, even though the fund did not satisfy the criteria established under applicable state law for alternative investments by public pension funds.  This article summarizes the relevant provisions of state law, the alleged misconduct by the respondents and the SEC’s charges.  For more on public pension funds, see “Why and How Do Corporate and Government Pension Plans, Endowments and Foundations Invest in Hedge Funds?,” The Hedge Fund Law Report, Vol. 6, No. 14 (Apr. 4, 2013).

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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. 7 No.7 (Feb. 21, 2014)

    Understanding U.S. Public Pension Plan Delegation of Investment Decision-Making to Internal and External Investment Managers (Part Three of Three)

    This is the third installment in our three-part series addressing the evolution of U.S. pension plan management and governance.  This installment focuses on what the next phase of pension evolution may look like and also highlights how, at least in one area, governance research can be developed to be a true value-added tool for public pension plans and their trustees, potentially guiding the design of their governance structures and investment infrastructures.  The first installment highlighted how growth of public pension plans and fundamental legal or regulatory change, when combined with increasing pension portfolio complexity and the current underfunded status of most U.S. public pension plans, will be the forces defining pension evolution in the twenty-first century.  The first installment also included an explanation of why the growth of public pension plans and fundamental legal or regulatory change impacted pension plan evolution through the twentieth century.  See “Understanding U.S. Public Pension Plan Delegation of Investment Decision-Making to Internal and External Investment Managers (Part One of Three),” The Hedge Fund Law Report, Vol. 7, No. 3 (Jan. 23, 2014).  The second installment described the current governance structures of today’s public pension, focusing on the board of trustees and pension staff; briefly reviewed current governance research about public pension trustees, and the importance of both adequate staff infrastructure and effective delegation as features of good governance; and explained the new delegation rule and why it should be a key element of long-term organizational change within the U.S. pension system.  See “Understanding U.S. Public Pension Plan Delegation of Investment Decision-Making to Internal and External Investment Managers (Part Two of Three), The Hedge Fund Law Report, Vol. 7, No. 5 (Feb. 6, 2014).  The author of this series is Von M. Hughes, a Managing Director at Pacific Alternative Asset Management Company, LLC.

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  • From Vol. 7 No.5 (Feb. 6, 2014)

    Understanding U.S. Public Pension Plan Delegation of Investment Decision-Making to Internal and External Investment Managers (Part Two of Three)

    This is the second article in a three-part series addressing the evolution of U.S. pension plan management and governance.  This article describes the current governance structures of today’s public pension, focusing on the board of trustees and pension staff; briefly reviews current governance research about public pension trustees, and the importance of both adequate staff infrastructure and effective delegation as features of good governance; and explains the new delegation rule and why it should be a key element of long-term organizational change within the U.S. pension system.  The first article highlighted how growth of public pension plans and fundamental legal or regulatory change, when combined with increasing pension portfolio complexity and the current underfunded status of most U.S. public pension plans, will be the forces defining pension evolution in the twenty-first century.  The first article also included an explanation of why the growth of public pension plans and fundamental legal or regulatory change impacted pension plan evolution through the twentieth century.  See “Understanding U.S. Public Pension Plan Delegation of Investment Decision-Making to Internal and External Investment Managers (Part One of Three),” The Hedge Fund Law Report, Vol. 7, No. 3 (Jan. 23, 2014).  The third article will focus on what the next phase of pension evolution may look like and also highlight how, at least in one area, governance research can be developed to be a true value-added tool for public pension plans and their trustees, potentially guiding the design of their governance structures and investment infrastructures.  The author of this series is Von M. Hughes, a Managing Director at Pacific Alternative Asset Management Company, LLC.

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  • From Vol. 7 No.3 (Jan. 23, 2014)

    Understanding U.S. Public Pension Plan Delegation of Investment Decision-Making to Internal and External Investment Managers (Part One of Three)

    As U.S. pension plans increasingly represent an important and sticky source of assets for hedge fund managers, it is imperative for managers to understand the evolution of pension plan organization and management as well as the legal obligations borne by pension plan trustees when delegating investment decision-making to, among others, hedge fund managers.  Understanding these parameters of prudent delegation can help managers respond more effectively to the needs of pension plans and their trustees, which will be essential in their quest to raise and retain capital from such pension plans.  To aid in this understanding, we are publishing this three-part series addressing the evolution of U.S. pension plan management and governance.  Part one highlights how growth of public pension plans and fundamental legal or regulatory change, when combined with increasing pension portfolio complexity and the current underfunded status of most U.S. public pension plans, will be the forces defining pension evolution in the twenty-first century.  For the reader’s reference, part one also includes, as Appendix A, an explanation of why the growth of public pension plans and fundamental legal or regulatory change impacted pension plan evolution through the twentieth century.  Part two will describe the current governance structures of today’s public pension, focusing on the board of trustees and pension staff; briefly review current governance research about public pension trustees, and the importance of both adequate staff infrastructure and effective delegation as features of good governance; and explain the new delegation rule and why it should be a key element of long-term organizational change within the U.S. pension system.  Part three will focus on what the next phase of pension evolution may look like and also highlight at least how, in one area, governance research can be developed to be a true value-added tool for public pension plans and their trustees, potentially guiding the design of their governance structures and investment infrastructures.  The author of this series is Von M. Hughes, a Managing Director at Pacific Alternative Asset Management Company, LLC.

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  • From Vol. 6 No.32 (Aug. 15, 2013)

    First Circuit Holds that Private Equity Fund May Be Liable for Unfunded Pension Obligations of Portfolio Company

    Private equity funds often exercise significant management control over, and effect changes to management and operations of, portfolio companies.  On July 24, 2013, the U.S. Court of Appeals for the First Circuit ruled that, as a result of those “hands on” activities, a private equity fund may constitute a “trade or business” within the meaning of the Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendment Act of 1980.  As such, a private equity fund could potentially face liability for the unfunded pension obligations of a portfolio company.

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  • From Vol. 6 No.14 (Apr. 4, 2013)

    Why and How Do Corporate and Government Pension Plans, Endowments and Foundations Invest in Hedge Funds?

    A growing proportion of the capital flowing into hedge funds is coming from institutional investors.  Therefore, hedge fund managers looking to raise capital effectively must understand the financial condition, motivations and allocation preferences of different institutional players.  To help hedge fund managers develop and refine such an understanding, we have recently published a series of articles on institutional investor investment preferences, each focusing on a different category of investor.  The first article in the series focused on family offices.  See “Why and How Do Family Offices and Foundations Invest in Hedge Funds?,” The Hedge Fund Law Report, Vol. 6, No. 1 (Jan. 3, 2013).  The second article in the series focused on sovereign wealth funds.  See “Why and How Do Sovereign Wealth Funds Invest in Hedge Funds?,” The Hedge Fund Law Report, Vol. 6, No. 13 (Mar. 28, 2013).  This article, as the title implies, focuses on corporate and government pension plans, endowments and foundations.  See also “The Four P’s of Marketing by Hedge Fund Managers to Pension Plan Managers in the Post-Placement Agent Era: Philosophy, Process, People and Performance,” The Hedge Fund Law Report, Vol. 2, No. 45 (Nov. 11, 2009).

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  • From Vol. 6 No.11 (Mar. 14, 2013)

    Credit Suisse Survey Reveals Allocation Preferences of Hedge Fund Investors, With Particular Attention on Preferences of Pension Funds and Insurance Companies

    Credit Suisse AG recently released a survey covering institutional investor strategy and allocation preferences and return expectations for this year, as well as investors’ perspectives on topics such as fund fees, perceived risks and manager start-ups.  The survey focused in particular on the perspectives of pension funds and insurance companies, because those investors are a primary source of growth in hedge fund assets under management.  This article summarizes key findings from that survey.

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  • From Vol. 5 No.18 (May 3, 2012)

    Ten Strategies for Preventing Disclosure of Confidential Hedge Fund Data under State Sunshine Laws

    Public pension funds are among the most coveted types of investors in hedge funds.  This is so for various reasons.  Public pension funds typically make large investments for the long term.  They often spend considerable time on investment and operational due diligence and only commit capital after scrupulous analysis.  Accordingly, an investment from a credible public pension fund is often more than just a source of capital – it also acts as an imprimatur, a vote of confidence and a letter of recommendation when approaching other investors.  But for hedge fund managers, investments from public pension funds can also have downsides.  One of the more notable downsides is the one-two punch of more information demanded and less control over information provided.  That is, public pension funds often demand from their hedge fund managers – and often receive as a result of their size and concomitant clout – significant transparency into things like portfolio composition, industry concentration, regulatory developments and similar items.  At the same time, public pension funds are typically subject to state “sunshine” laws – laws that generally require government bodies to disclose information about their business and investment activities unless an exemption is available.  For hedge fund managers that want public pension plan investors but do not want to disclose their confidential data, the existence of state sunshine laws would appear to present an unpleasant binary choice: accept pension money (if you can get it) and disclose, or reject pension money and maintain confidentiality.  But the choice need not be so stark.  There are ways to accept public pension plan investors while protecting the confidentiality of competitively sensitive information to a significant degree.  This article outlines ten strategies for doing so and, to contextualize those strategies, discusses: what sunshine laws are; the information typically required to be disclosed pursuant to sunshine laws; some common exemptions from disclosure included in sunshine laws; and the process for challenging a request for disclosure pursuant to sunshine laws.

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  • From Vol. 5 No.9 (Mar. 1, 2012)

    Applicability of New Disclosure Obligations Under ERISA to Hedge Fund Managers

    More and more ERISA-covered benefit plans (especially defined benefit pension plans) are becoming interested in alternative investments, including hedge funds, and assets under management in the hedge fund industry are growing.  The U.S. Department of Labor (DOL) recently reported that the total amount of assets held by private pension plans increased to about $5.5 trillion by the end of the plans’ 2009 plan years (including about $2.2 trillion held by defined benefit pension plans).  Private Pension Plan Bulletin, DOL, Employee Benefits Security Administration (2011).  (The DOL’s numbers do not include the amount of assets in public pension plans and individual retirement accounts.)  And a recent survey conducted by Credit Suisse found that assets under management in hedge funds globally are on track to reach $2.13 trillion by the end of 2012.  Given these numbers and trends, hedge fund managers are increasingly likely to consider marketing their funds to benefit plans as investment opportunities.  However, if ERISA-covered benefit plans (and certain other tax-exempt retirement vehicles) own 25% or more of any class of equity interest in a hedge fund, an undivided portion of all of the underlying assets of the hedge fund becomes “plan assets” subject to ERISA, and the manager of the hedge fund becomes a fiduciary under ERISA to the ERISA-covered benefit plan investors.  See “How Can Hedge Fund Managers Accept ERISA Money Above the 25 Percent Threshold While Avoiding ERISA’s More Onerous Prohibited Transaction Provisions? (Part One of Three),” The Hedge Fund Law Report, Vol. 3, No. 19 (May 14, 2010).  This raises a number of issues for such a “covered” hedge fund manager.  One of those issues that will arise this year for the first time is a final rule released by the DOL on February 2, 2012 under ERISA §408(b)(2) regarding fee disclosures by service providers to ERISA plans.  In a guest article, Fred Reish, Bruce Ashton and Gary Ammon, all Partners in the Employee Benefits & Executive Compensation Group at Drinker Biddle & Reath LLP, analyze, with respect to the final rule under ERISA §408(b)(2): covered plans; covered service providers; covered services; disclosure requirements; the effective date for compliance; the definition of compensation for purposes of the rule; how to handle changes in information or status; disclosure errors; and related topics.  This article is relevant to hedge fund managers that have ERISA investors or are considering marketing to such investors.

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  • From Vol. 4 No.36 (Oct. 13, 2011)

    Public Pension Funds and Endowments Increase Allocations to Hedge Funds, While Allocations from Family Offices Slide

    On September 27, 2011, investment management software and services provider PerTrac hosted a webinar entitled “Institutional Asset Allocation: The Latest Trends From Pensions, Family Offices and Endowments.”  Lois Peltz, of information service provider Infovest21, delivered the presentation, which was the second of a two-part series.  The presentation laid out the results of Infovest21’s recent study (Study) of where and how family office, public pension fund and endowment assets are being allocated.  See “Developments in Family Office Regulation: Part Three,” The Hedge Fund Law Report, Vol. 4, No. 23 (Jul. 8, 2011).  The purpose of the event was to keep hedge fund managers, among others, up to date on investing trends and provide insight into how institutional investors are making investment decisions.  See “Implications for Hedge Funds of a Potential Paradigm Shift in Pension Fund Allocation Strategies,” The Hedge Fund Law Report, Vol. 3, No. 16 (Apr. 23, 2010).  This article summarizes the salient ideas and investment trends discussed in the course of the webinar.

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  • From Vol. 4 No.19 (Jun. 8, 2011)

    Houston Pension Fund Sues Hedge Fund Manager Highland Capital Management and JPMorgan for Breach of Fiduciary Duty, Alleging Self-Dealing and Conflicts of Interest

    In 2006 and 2007, plaintiff Houston Municipal Employees Pension System (HMEPS) invested an aggregate $15 million with hedge fund Highland Crusader Fund, L.P. (Fund).  The Fund was sponsored by Highland Capital Management, L.P. (Highland), which also served as the Fund’s investment manager.  The Fund’s general partner was defendant Highland Crusader Fund GP, L.P. (General Partner).  Defendant J.P. Morgan Investor Services Co. (JPMorgan) provided administrative support to the Fund.  The Fund is now in liquidation.  In a lawsuit filed in the Delaware Court of Chancery on May 23, 2011, HMEPS generally claims that, during the credit crisis of 2008, the Highland defendants and their principals “looted” the Fund with the assistance of JPMorgan and engaged in self-dealing by selling themselves high-quality assets from the Fund and leaving the Fund with junk assets.  HMEPS relies in part on a whistleblower complaint filed by a JPMorgan employee who observed “questionable accounting and management practices” at the Fund.  HMEPS claims that Highland, the General Partner and their principals breached their fiduciary duties to the Fund and that JPMorgan aided and abetted that breach.  HMEPS is suing derivatively on behalf of the Fund.  We summarize HMEPS’ specific allegations and Highland’s recent press release in response.

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  • From Vol. 4 No.15 (May 6, 2011)

    New Jersey Appellate Court Holds that Limited Partnership Agreements Covering State Pension Fund Private Equity Investments are Exempt from Disclosure under New Jersey’s Open Public Records Act

    The Appellate Division of the New Jersey Superior Court has handed down a ruling preventing the disclosure of private equity limited partnership agreements (LP agreements) to union representatives who sought copies of those agreements.  Plaintiffs are two state employee unions whose pension funds were partly invested in private equity funds by New Jersey’s pension manager.  The plaintiffs sought disclosure of the LP agreements both under New Jersey’s Open Public Records Act (OPRA) and under common law principles of public access to government documents.  OPRA grants broad public access to “government records” but enumerates several exemptions from disclosure.  Cf. “Repeal of Dodd-Frank Confidentiality Protection for SEC: What Investment Advisers Lost and What Remains,” The Hedge Fund Law Report, Vol. 3, No. 47 (Dec. 3, 2010).  The New Jersey Treasurer argued that the LP agreements were exempt as both proprietary commercial/financial information and as trade secrets.  The Treasurer also argued that the common law right to disclosure of the documents was outweighed by the State’s interest in preserving the confidentiality of the LP agreements.  The Court agreed with the State and prevented disclosure.  We summarize the Court’s reasoning.  For a discussion of a North Carolina case in which a nonprofit corporation was permitted to pursue its claim for records pertaining to state hedge fund investments in the context of a “pay to play” investigation, see “North Carolina Supreme Court Rules that State Pension Fund May Have to Disclose Information about Pension Fund’s Hedge Fund Investments, Including Hedge Fund and Manager Names, Identity of Manager Principals, Positions, Returns and Fees,” The Hedge Fund Law Report, Vol. 3, No. 27 (Jul. 8, 2010).  See generally “Delaware High Court Affirms Order Compelling Defunct Hedge Fund Parkcentral Global to Divulge Its List of Limited Partners to Another Limited Partner in Order to Facilitate Future Litigation Against the Fund and Its Affiliates,” The Hedge Fund Law Report, Vol. 3, No. 33 (Aug. 20, 2010).

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  • From Vol. 4 No.11 (Apr. 1, 2011)

    CalPERS “Special Review” Includes Details of Misconduct and Recommendations That May Fundamentally Alter the Hedge Fund Placement Agent Business

    In 2009, the California Public Employees’ Retirement System (CalPERS) – the largest state pension fund in the country, with about $228 billion in assets held for the benefit of over 1.6 million California public employees, retirees and their families – discovered that exorbitant fees had been paid by certain of its external money managers to placement agents.  CalPERS retained the law firm of Steptoe & Johnson LLP to investigate whether the payment of these fees compromised the interests of its participants and beneficiaries.  The Steptoe investigation focused on placement agents that allegedly used their connections with certain members of CalPERS’ Board of Administration (Board), executive staff and senior officers to obtain excessive fees from money managers and others who wished to obtain access to CalPERS contracts.  As previously reported in The Hedge Fund Law Report, in December 2010, the law firm issued a series of twelve preliminary recommendations to CalPERS’ Board and its executive staff for its immediate consideration in remedying the harm to its beneficiaries and participants caused by the improper use of placement agents.  See “CalPERS Special Review Foreshadows Seismic Shift in Business Arrangements among Public Pension Funds, Hedge Fund Managers and Placement Agents,” The Hedge Fund Law Report, Vol. 4, No. 1 (Jan. 7, 2011).  Since that time, CalPERS has effectively adopted each of these recommendations.  Then, on March 14, 2011, Steptoe & Johnson issued the “Report of the CalPERS Special Review.”  This Report detailed, subject to limitations requested by law enforcement agencies and allegations for which the law firm could not obtain sufficient corroboration, the apparent misconduct and ethical breaches committed by former CalPERS Board members and employees.  The Report also offered four additional recommendations to prevent a recurrence.  As a result of its size and experience with hedge funds, CalPERS is a trendsetter for other public pension funds and institutional investors with respect to hedge fund investment terms and governance, placement agent relationships and related matters.  Accordingly, the Report, like the previously issued recommendations, is of broad interest to hedge fund managers, investors and service providers.  See generally “Lessons for Hedge Fund Managers on Liquidity, Allocations, Marketing and More from Yale’s 2009 Endowment Report,” The Hedge Fund Law Report, Vol. 3, No. 14 (Apr. 9, 2010).  Indeed, the Report acknowledges that CalPERS’ experience “was apparently no different . . . than that of a number of other public pension funds.”  This article summarizes: the findings of the Report; the four key recommendations made in the Report; and the terms of letter agreements entered into with respect to fees between CalPERS and some of its more prominent external money managers, including Apollo Global Management.

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  • From Vol. 4 No.8 (Mar. 4, 2011)

    U.S. District Court Dismisses All Claims by Seattle City Employees’ Retirement System Against Hedge Fund Epsilon Global in Pension Fund’s Suit Seeking to Compel Epsilon to Produce Audited Financial Statements

    Plaintiff in this action is the Seattle City Employees’ Retirement System (SCERS) which, from December 2003 through December 2004, had invested $20 million in defendant hedge fund Epsilon Global Active Value Fund II, Ltd. (Epsilon or Fund).  Epsilon was a feeder fund that invested substantially all of its assets in defendant Epsilon Global Master Fund II, Ltd. (Master Fund).  The Fund’s offering documents required it to provide an annual report and an annual audited financial statement to each investor within 120 days after the end of its fiscal year.  Following the liquidity crises of 2008, Epsilon failed to produce an annual report or audited financial statements.  In January 2010, as Epsilon continued to fail to produce the requisite reports, SCERS notified Epsilon that it desired to redeem its entire investment.  Epsilon responded that it had suspended redemptions pending completion of its audit.  After negotiations for a partial redemption of SCERS’ position failed, SCERS commenced this action against the Master Fund, Epsilon, its general partner, its investment manager and one of the Fund’s principals.  SCERS sought a temporary restraining order and preliminary injunction directing the Fund to produce the requisite annual reports and prohibiting the Fund from paying fees to its manager pending redemption of SCERS’ interest in the Fund.  By the time of the Court’s hearing on the preliminary injunction request, Epsilon had provided SCERS with unaudited financial statements for 2008 and 2009 and other financial information for the Fund.  In May 2010, the Court ruled that, since completion of the audit was solely in the hands of the Fund’s auditor, it was impossible to order the Fund to complete the audit.  In addition, the Court noted that Epsilon had already provided SCERS with all available information in its possession.  Consequently, the Court denied SCERS’ request for a preliminary injunction.  The parties eventually agreed to dismiss the action without prejudice.  We summarize the claims in the suit and the Court’s decision.

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  • From Vol. 4 No.1 (Jan. 7, 2011)

    CalPERS Special Review Foreshadows Seismic Shift in Business Arrangements among Public Pension Funds, Hedge Fund Managers and Placement Agents

    Over the course of 2010 and into 2011, the California Public Employees’ Retirement System (CalPERS) has been investigating and addressing whether the interests of CalPERS participants and beneficiaries were compromised by the payment of placement agent fees and related activities.  See “Three Significant Legal Pitfalls for Hedge Fund Marketers, and How to Avoid Them,” The Hedge Fund Law Report, Vol. 3, No. 36 (Sep. 17, 2010).  However, what started as a review arising out of the well-publicized placement agent scandals of 2009 has expanded in scope to include a special review of the organization and operation of CalPERS itself; the “fitness” of CalPERS employees and its external investment managers; and the fee arrangements among CalPERS, its external investment managers and placement agents.  See “Indemnification Provisions in Agreements between Hedge Fund Managers and Placement Agents: Reciprocal, But Not Necessarily Symmetrical,” The Hedge Fund Law Report, Vol. 3, No. 41 (Oct. 22, 2010).  In a report dated December 2010, Steptoe & Johnson LLP, the law firm leading the special review, summarizes its observations and recommendations in the foregoing areas.  The report indicates that CalPERS has already implemented many of Steptoe’s recommendations, and Steptoe expects CalPERS to implement those of the recommendations it has not yet implemented.  The Steptoe report is important for all hedge fund managers, for the following reasons.  For those managers fortunate enough to have CalPERS as a current investor, the report foreshadows likely demands from CalPERS in the areas of fees, use and compensation of placement agents, conflicts of interest, gifts and travel, employment of former CalPERS board members and staff, public disclosure of information provided to CalPERS, location and lavishness of annual meetings and other topics.  Even for hedge fund managers that do not count CalPERS as a current investor, the report is relevant.  (For a discussion of when to approach certain types of investors, see “Prime Broker Merlin Securities Develops Spectrum of Hedge Fund Investors; Event Hosted by Accounting Firm Marcum LLP Examines Marketing Implications of the Merlin Spectrum,” The Hedge Fund Law Report, Vol. 3, No. 39 (Oct. 8, 2010).)  Here is why: CalPERS is the largest public pension fund in the U.S.  As of January 5, 2011, the total CalPERS fund market value was $226.5 billion, with about 14 percent, or $31.7 billion, allocated to “private equity” and other “alternative investments.”  Like Yale among endowments, CalPERS among pension funds has been and continues to be a trendsetter with respect to the terms under which institutional investors allocate capital to hedge funds.  See “Lessons for Hedge Fund Managers on Liquidity, Allocations, Marketing and More from Yale’s 2009 Endowment Report,” The Hedge Fund Law Report, Vol. 3, No. 15 (Apr. 9, 2010).  That is, other institutional investors look to the actions of CalPERS as precedents in the areas of terms, fees, governance, risk management, manager selection, due diligence, mitigation of conflicts of interest and others.  Indeed, the Steptoe report is cognizant of CalPERS’ stature as an institutional investor, noting that CalPERS can, by adopting the recommendations in the report, “set a standard for other public pension funds to follow.”  (By the same token, the report takes CalPERS to task for inadequately using its “purchasing power” – our phrase, not the report’s – to negotiate lower fees with external managers.  However, the report also notes that CalPERS has recently improved in this area and obtained over $200 million in fee concessions from external managers in various asset classes.)  Given the importance of CalPERS as an investor in hedge funds, the terms it demands from external managers are likely to be demanded by other investors of comparable bargaining power (or requested by investors of lesser bargaining power).  Similarly, the concerns identified by CalPERS are likely to make their way into due diligence questionnaires of other investors.  Accordingly, this article offers a comprehensive review of the Steptoe report, along with commentary on how the report’s recommendations may alter the relationship among public pension funds, hedge fund managers and placement agents.  One of the more dramatic recommendations in the report would involve shifting a greater percentage of the compensation of external managers to performance fees, and away from management fees.  We discuss (among other things) the implications of this recommendation, and how – especially for smaller or start-up managers – this revised approach to fees can make it difficult to “keep the lights on.”

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  • From Vol. 3 No.39 (Oct. 8, 2010)

    Prime Broker Merlin Securities Develops Spectrum of Hedge Fund Investors; Event Hosted by Accounting Firm Marcum LLP Examines Marketing Implications of the Merlin Spectrum

    In August of this year, prime broker Merlin Securities, LLC released a white paper dividing the universe of hedge fund investors into ten categories, and arranging those categories along a spectrum from least to most “institutional.”  By institutional, Merlin was referring to the demand placed on hedge fund managers by each type of investor with respect to assets, operational practices, risk management, track record, reporting and other factors.  On September 23, 2010, at an event hosted by accounting firm Marcum LLP, Ron Suber, Senior Partner at Merlin and an author of the white paper, expanded on the institutional investor spectrum and its implications for hedge fund marketing.  This article outlines the Merlin investor spectrum and details the key takeaways from the Marcum conference with respect to hedge fund marketing, including a discussion of hedge fund seeding by pension funds.  Like any analytical framework, Merlin’s spectrum is intended to help managers clarify their marketing efforts and develop reasonable expectations, rather than to apply without alteration to every factual context.  As discussed more fully below, according to Merlin, it generally would not be realistic for a startup manager to target only pension funds in its marketing efforts; but by the same token, as discussed at the Marcum event, some pension funds have explored or executed hedge fund seeding deals, so startup managers should not rule out marketing to pension funds altogether.  See “How Should Hedge Fund Managers Adjust Their Marketing to Pension Funds in Light of Potential Downward Revisions to Pension Funds’ Projected Rates of Return?,” The Hedge Fund Law Report, Vol. 3, No. 11 (Mar. 18, 2010); “The Four P’s of Marketing by Hedge Fund Managers to Pension Fund Managers in the Post-Placement Agent Era: Philosophy, Process, People and Performance,” The Hedge Fund Law Report, Vol. 2, No. 45 (Nov. 11, 2009).

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  • From Vol. 3 No.27 (Jul. 8, 2010)

    North Carolina Supreme Court Rules that State Pension Fund May Have to Disclose Information about Pension Fund’s Hedge Fund Investments, Including Hedge Fund and Manager Names, Identity of Manager Principals, Positions, Returns and Fees

    In February 2007, Forbes magazine published an expose on the activities of Richard Moore, Treasurer for the State of North Carolina.  The article accused him, as the sole fiduciary over a State Retirement System containing $73 billion in assets, of engaging in a “pay-to-play” scheme or of accepting campaign contributions from dozens of financial firms that hoped to be selected as investment managers for the state pension fund.  See “Pensions, Pols, Payola,” Neil Weinberg, Forbes, Mar. 12, 2007.  (For more on the pay-to-play/pension fund kickback scandal in New York State and the Securities and Exchange Commission’s pay-to-play rule in its proposed form, see “What Do the Regulatory and Industry Responses to the New York Pension Fund ‘Pay to Play’ Scandal Mean for the Future of Hedge Fund Marketing?,” The Hedge Fund Law Report, Vol. 2, No. 30 (Jul. 29, 2009); “How Has the New York Pension Fund Kickback Scandal Changed the Landscape for Placement Agents, and for Hedge Fund Managers who Use Them?,” The Hedge Fund Law Report, Vol. 2, No. 17 (Apr. 30, 2009)).  The State Employees Association of North Carolina, Inc. (SEANC), a nonprofit corporation which protects the retirement interests of State employees, learned of the Forbes article, and requested all public records relating to these deals from the Treasurer under the North Carolina Public Records Act (the State equivalent of the Federal Freedom of Information Act).  After the Treasurer failed to fully comply with the request, SEANC filed a complaint that a state trial court dismissed.  On June 17, 2010, North Carolina’s highest court reinstated that complaint after finding that its allegations, if proven, would establish a prima facie case of a violation of the state Public Records Act.  We summarize the background of the action, the Court’s legal analysis and its implications for the types of hedge fund investment information that a third party can obtain from a public pension fund.

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  • From Vol. 3 No.16 (Apr. 23, 2010)

    Implications for Hedge Funds of a Potential Paradigm Shift in Pension Fund Allocation Strategies

    Public pension funds are the largest institutional allocator of capital to hedge funds by dollar value.  Accordingly, how public pension fund managers approach asset allocation matters profoundly to the size, strategies and revenues of the hedge fund industry.  Recently, managers of some prominent public pension funds have been rethinking their approach to asset allocation in light of the lessons of the credit crisis.  Three of the more important lesson from the crisis relate to liquidity, risk and correlation.  The liquidity story is well-known: it dried up, and many hedge fund investors who needed liquidity were not able to get it.  With respect to risk, the crisis highlighted the inadequacy of existing risk management tools employed by hedge fund investors.  And regarding correlation, the crisis witnessed assets heretofore considered uncorrelated moving – generally downward – in lockstep.  Some public pension fund managers have revised, or are considering revising, their asset allocation strategies to incorporate these three lessons.  Under the old paradigm, pension funds allocated their considerable assets based on asset class or type.  That is, they invested designated percentages of their assets in bonds, stocks, real estate, private funds (hedge funds, private equity funds, venture capital funds, infrastructure funds, etc.) and cash.  Under the new approach, pension funds are allocating their assets to categories defined by three key considerations: drivers of return, liquidity and risk.  For example, as explained more fully below, under the old approach, Treasury Inflation Protected Securities (TIPS) generally were grouped with bonds for allocation purposes.  However, the Alaska Permanent Fund Corporation (Alaska PFC) now groups TIPS with other assets intended to protect against inflation, including real estate and infrastructure investments.  (The Alaska PFC is the state-owned corporation in charge of administering the Alaska Permanent Fund.  Under the Alaska state constitution, 25 percent of the state’s mineral revenues are placed in the Alaska Permanent Fund, which is invested in a diversified portfolio and pays income dividends to qualifying Alaska residents.)  Similarly, Denmark’s ATP Fund, the largest Danish pension fund, reportedly has combined public and private equity for allocation purposes because the returns of both asset classes are affected to a significant degree by corporate earnings.  Previously, the ATP Fund had separated public and private equity for allocation purposes.  This article examines the potential paradigm shift in pension fund allocation strategy in more depth.  In particular, it discusses the evolving views of pension fund managers on liquidity and risk.  In addition, based on an interview conducted by The Hedge Fund Law Report with Michael Burns, CEO of the Alaska PFC, the article provides a detailed description of Alaska’s revised allocation approach.  Since CalPERS is also considering a shift to an allocation strategy based on drivers of returns, Alaska’s revised approach may serve as a persuasive precedent.  Finally, the article discusses the potential impact on hedge funds of pension funds’ changed allocation strategy, and briefly describes the related trend toward “liability-driven” investing.

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  • From Vol. 3 No.12 (Mar. 25, 2010)

    Federal District Court Dismisses Lawsuit Brought by San Diego County Employees Retirement Association against Hedge Fund Manager Amaranth Advisors and Related Parties for Securities Fraud, Gross Negligence and Breach of Fiduciary Duty

    On March 29, 2007, the San Diego County Employees Retirement Association (SDCERA) filed a lawsuit against collapsed hedge fund manager Amaranth Advisors LLC (Amaranth) and several related individuals, including the fund manager’s one-time chief energy trader, Brian Hunter, in the U.S. District Court for the Southern District of New York, alleging securities fraud, common law fraud and several other causes of action.  In essence, the plaintiff alleged that the defendants fraudulently induced SDCERA into investing in funds managed by Amaranth, then dissuaded it from withdrawing that investment with a number of misrepresentations upon which SDCERA allegedly relied to its detriment.  The recurring theme in these allegations was that defendant Amaranth represented itself as managing a multi-strategy fund with sophisticated risk management controls when in reality it operated a single-strategy fund making essentially unhedged bets.  On March 15, 2010, District Court Judge Deborah A. Batts granted the defendants’ motions to dismiss each of the several counts of the complaint.  Judge Batts ruled that SDCERA’s claim under federal securities law – that it was fraudulently induced to purchase its interests in the Amaranth fund – was unreasonable as a matter of law; that choice-of-law principles dictated that the issue of common law fraud be decided according to the law of the state of Connecticut, where Amaranth was originally incorporated; that the claims of gross negligence and of breach of fiduciary duty are derivative, not subjects for a direct cause of action, and the plaintiffs failed to satisfy the requirements for a derivative action; and that Amaranth was not itself a party to the contract – which was between the plaintiff and the fund – so the management company was not liable on a breach of contract claim.  This article details the facts of the action and the issue of whether the court had personal jurisdiction over one of the defendants, Brian Hunter, who resides in Calgary, Canada, then analyzes the court’s rationale for its dismissal of each of the counts for failure to state a claim on which relief can be granted.

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  • From Vol. 3 No.11 (Mar. 18, 2010)

    How Should Hedge Fund Managers Adjust Their Marketing to Pension Funds in Light of Potential Downward Revisions to Pension Funds’ Projected Rates of Return?

    Recent market chatter suggested that public pension funds – as a group, one of the largest allocators of capital to hedge funds – were considering reducing their target rates of return.  For example, recent news reports suggested that the California Public Employees’ Retirement System (CalPERS), the largest public pension fund in the U.S., was considering reducing its target annual rate of return from 7.75 percent to 6 percent.  One of the headline responses to the rumored reduction in pension fund investment targets was that such reductions would decrease the capital allocated to hedge funds by pension funds.  The assumption behind this idea was that pension funds invest in hedge funds for alpha, or above-market returns, and because the reduced investment targets would be more in line with beta, or market returns, pension funds no longer needed the market-beating services of hedge funds.  However, while alpha may be one reason why pension funds invest in certain hedge funds, it is by no means the only reason.  In fact, in the wake of the credit crisis, alpha has fallen in the ranking of rationales for pension fund investments in hedge funds, and other rationales are ascendant.  As explained more fully below, those other rationales include, but are not limited to: uncorrelated returns; absolute returns; reduced volatility; sophisticated risk management; access to standout managers; and access to unique assets.  In short, even if pension funds reduce their investment targets – and whether or not they will remains uncertain – pension funds are likely to continue allocating capital to hedge funds, likely at a hastening clip.  See “The Four P’s of Marketing by Hedge Fund Managers to Pension Fund Managers in the Post-Placement Agent Era: Philosophy, Process, People and Performance,” The Hedge Fund Law Report, Vol. 2, No. 45 (Nov. 11, 2009).  But as they do, the specific factors on which pension funds base their hedge fund investment decisions are likely to evolve in subtle but important ways.  In other words, while the potentially reduced investment targets likely will not materially diminish the volume of pension fund allocations to hedge funds, they do reflect a shift in the focus of pension funds’ concerns.  For hedge fund managers seeking to raise and retain institutional capital, it is critical to understand pension fund decision-making and to translate that understanding into informed marketing strategies.  Accordingly, this article examines how hedge fund managers may adjust their marketing to pension funds in light of the potentially reduced investment targets.  Or more precisely, this article examines how hedge fund managers may refocus their investment strategies and operations in light of pension fund concerns – because marketing in the hedge fund context should not be a matter of puffery or salesmanship, but rather should be a matter of clearly, candidly and comprehensively conveying a manager’s strategy and operations.  In particular, this article discusses: the potential reduction in target returns; the rationale for pension fund investments in hedge funds; trends and data with respect to such investments; specific marketing strategies that hedge fund managers can employ when targeting pension funds (including discussions of strategy drift, pension fund consultants, liquidity and other relevant matters); and the evolving role of placement agents in connecting pension funds and hedge funds.

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  • From Vol. 2 No.45 (Nov. 11, 2009)

    The Four P’s of Marketing by Hedge Fund Managers to Pension Fund Managers in the Post-Placement Agent Era: Philosophy, Process, People and Performance

    As a result of the recent “pay to play” scandals in New York, California and other states, the SEC, New York Attorney General Andrew Cuomo and certain state pension fund managers have restricted or prohibited hedge fund managers from using placement agents when marketing to state pension fund managers.  See “What Do the Regulatory and Industry Responses to the New York Pension Fund ‘Pay to Play’ Scandal Mean for the Future of Hedge Fund Marketing?,” The Hedge Fund Law Report, Vol. 2, No. 30 (Jul. 29, 2009).  Prior to the pay to play scandals, placement agents often served an important intermediary role between investment managers and the trustees of state retiree money: they understood the investment goals of pension funds and the investment competencies of particular managers, and they added value by connecting goals with appropriate competencies.  However, the regulatory and industry responses to the pay to play scandals – still perceived in various quarters as unduly draconian – have all but eliminated placement agents from hedge fund manager marketing efforts, at least to the extent those efforts are directed at state pension funds, and at least for now.  At the same time, pension funds are expected to contribute a growing proportion of the assets under management by hedge funds in the next few years.  So who or what is going to fill the hedge fund marketing void that has opened up in the post-placement agent era?  In an effort to answer that question, this article revisits the New York State pension kickback case then discusses: the reduction in the use of placement agents by state pension funds in New York and California; the SEC’s recently proposed rule regarding placement agents; the move by pension funds away from allocations to funds of funds in favor of direct investments in hedge funds; specific examples of pension funds that have moved to single manager allocations; what precisely pension funds are looking for in allocating capital to single managers; specific steps that hedge fund managers can take to market to pension fund managers without relying on placement agents; considerations with respect to in-house marketing teams and prime broker capital introduction services; due diligence by pension funds; and background checks.

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  • From Vol. 2 No.17 (Apr. 30, 2009)

    As Pension Funds Exceed Hedge Fund Allocation Guidelines as Other Asset Classes Decline More Precipitously, Hedge Fund Managers Ask: Will Pension Funds Redeem or Revise their Allocation Guidelines?

    Amid the sound and fury in financial markets in 2008 and early 2009, one of the lesser told tales involved the relative resiliency of hedge funds.  Hedge funds were down by almost 20 percent last year, but the S&P 500 was down by almost double that amount.  Press reports emphasized that the hedge fund industry is likely to shrink “by half” in 2009 from its 2007 peak; but a new report from The Bank of New York Mellon Corporation and Casey, Quirk & Associates LLC found that the industry will almost double, in terms of assets under management, by 2013.  Moreover, the preponderance of the new assets invested in hedge funds is expected to come from pension funds, which remain interested in hedge funds for various reasons, including their uncorrelated returns, absolute return strategies and ability to manage risk in unique ways.  The continued and growing appetite among pension funds for hedge fund investments, combined with the laudable relative performance of hedge funds during the recent downturn, has created something of a conundrum for pension fund allocation guidelines.  Generally, those guidelines provide for the majority of funds to go into bonds (government and corporate) and equities, with a smaller percentage reserved for alternative assets generally or hedge funds specifically.  Oftentimes, those allocations are measured as of the date of investment, so subsequent events can results in actual allocations quite at odds with target allocations.  And that is just what has happened of late.  Hedge funds have declined, but other assets have declined more precipitously.  As a result, pension funds generally are “overweight” hedge funds and “underweight” certain worse-performing assets, such as equities.  The big question facing pension fund and hedge fund managers: will pension funds redeem from hedge funds to bring their actual allocations back into line with their target allocations?  Or will pension funds revise their target allocations to permit a greater proportion of their assets to be invested in hedge funds?  Research conducted by The Hedge Fund Law Report helps answer these important questions.

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  • From Vol. 2 No.14 (Apr. 9, 2009)

    Hedge Fund Managers Grapple with Legal and Practical Consequences of Demands from CalPERS, URS and Other Pension Funds for Better Investment Terms and Separate Accounts

    While better investment terms cannot completely offset poor hedge fund performance, poor or middling performance can increase the receptivity of managers to restructuring of their relationships with investors – especially large institutional investors.  Accordingly, while the credit crisis has engendered a rash of redemptions, it has also occasioned a series of restructurings of the terms under which significant institutions remain invested in hedge funds or make new investments.  However, while the terms of such restructurings have received significant and deserved attention, topics that have received less attention – but that may be as or more important than the terms themselves – include the mechanics by which the terms are implemented, and the legal considerations that may arise in connection with such implementation.  We explore these operational and legal considerations in detail, including: the relevant language in fund documents; investor consent requirements; liquidity issues; most favored nation provisions; redemption, registration and allocation issues; and cost considerations.

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  • From Vol. 2 No.12 (Mar. 25, 2009)

    Utah Retirement Systems’ “Summary of Preferred Hedge Fund Terms” Details Fee, Liquidity and Other Fund Terms that Institutional Investors are Requesting – or Demanding – from Hedge Fund Managers

    Paradigm shifts, in the financial world and outside of it, are often accompanied by a fundamental document; and the tectonic shift in the hedge fund world – the tipping in favor of investors – has acquired its own emblematic text.  That text is the “Summary of Preferred Hedge Fund Terms” (Summary) recently drafted by Larry Powell, Deputy Chief Investment Officer of the $16 billion Utah Retirement Systems, and it has been making the rounds among hedge fund managers and institutional investors.  Generally, the Summary calls for lower management and performance fees; the recognition of economies of scale in management fee arrangements and the passing on of those economies to investors; restructuring of performance fees so that the timing of payment matches the timing of realization of investments; liquidity that more closely matches the liabilities and time horizons of different investors; more prudent use of leverage; and increased transparency.  We offer a detailed description and discussion of the Summary, and industry reactions to it.

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  • From Vol. 1 No.2 (Mar. 11, 2008)

    SEC Warns Public Pension Funds About Inadequate Compliance Policies and Procedures Following Report of Investigation Into Insider Trading By Employees of the Retirement System of Alabama

    • The Retirement System of Alabama purchased stock in The Liberty Corporation based on information obtained in the course of providing debt financing to Liberty in connection with the acquisition of Liberty by a company controlled by the RIA.
    • The RIA had no compliance policies or procedures in place at the time of the insider trading, but agreed to institute such policies following the investigation.
    • The SEC wrote a Report of Investigation describing the matter, and used the occasion of the Report to remind pension funds that although they are generally exempt from the Investment Company Act and the Investment Advisers Act, they remain subject to the anti-fraud provisions of the federal securities laws and rules.
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