The Hedge Fund Law Report

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

Recent Issue Headlines

Vol. 5, No. 25 (Jun. 21, 2012) Print IssuePrint This Issue

  • How Should Hedge Fund Managers Allocate Form PF Expenses Between Their Hedge Funds and Their Management Entities?

    One of the most frequent types of questions posed by hedge fund managers to hedge fund lawyers is: Is this a fund expense or a management company expense?  The question arises so often because of the wide variety of expenses incurred in advising hedge funds and operating management entities, as well as the typically broad drafting of expense allocation provisions in fund governing documents.  Answers to such questions are important for both practical and legal reasons.  Practically, managers do not want to allocate expenses in a way that looks like overreaching, or that departs from market practice.  Legally, a mistaken allocation call may constitute a breach of fiduciary duty.  The stakes of allocation calls have always been high, but they are higher today than they have been heretofore, for two primary reasons.  First, the SEC recently highlighted allocation of expenses as an examination priority.  Second, many managers are facing a big, near-term allocation decision – how to allocate expenses in connection with preparing, completing and filing Form PF.  The Form PF process involves, among other things: gathering of fund information from disparate sources; computing, compiling and scrubbing of relevant data; interpreting ambiguous directives in the form; and completing and filing the form.  It’s a big and potentially expensive process, requiring managers to collect and manage up to 2,000 separate data points.  See “Ten Steps to a Successful Form PF,” The Hedge Fund Law Report, Vol. 5, No. 17 (Apr. 26, 2012).  The SEC has not provided guidance on whether Form PF expenses should be borne by the management company or the funds, and market practice and even applicable principles have been difficult to discern.  This article seeks to bring coherence to the critical but as yet unanswered question of how to allocate expenses in connection with Form PF.  In doing so, this article analyzes: the variety of Form PF expenses that managers can incur; how hedge fund managers generally approach the allocation of expenses between themselves and their funds; how general allocation principles apply specifically to the allocation of Form PF expenses; market practice among hedge fund managers with respect to allocating Form PF expenses; and specific steps managers can take to mitigate the uncertainty concerning Form PF expense allocation determinations.

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  • U.S. Supreme Court Resolves Circuit Split and Affirms Secured Creditors’ Right to Credit Bid Under Chapter 11 Plan

    On May 29, 2012, in RadLAX Gateway Hotels, LLC et al. v. Amalgamated Bank, the United States Supreme Court (Court) unanimously upheld the right of a secured creditor (such as a hedge fund that invests in secured distressed debt) to credit bid up to the full face value of its claim at the sale of collateral conducted under a so-called “cramdown” reorganization plan pursuant to Chapter 11 of the U.S. Bankruptcy Code.  The RadLAX decision resolved a split among the courts of appeals that led to uncertainty among lenders and debt investors, and forum shopping by debtors.  Previously, the Seventh Circuit affirmed the right to credit bid, whereas the Third and Fifth Circuits held that debtors could cram down a plan on dissenting secured creditors without affording them the right to credit bid as long as they were provided the “indubitable equivalent” of their claim.  See “Seventh Circuit Holds that Secured Lenders Must Have the Opportunity to Credit Bid in Asset Sales Under a Chapter 11 Plan,” The Hedge Fund Law Report, Vol. 4, No. 24 (Jul. 14, 2011).  This article summarizes the factual background of RadLAX, the Court’s decision and the implications of the decision for hedge fund managers.

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  • How Can Hedge Funds Mitigate the Risks of Investments in Litigation? An Interview with Kenneth A. Linzer

    Investing in litigation, like investing in hedge funds, can generate returns that are not correlated with the returns on other assets.  In an environment in which previously disparate assets are moving in unison – in large measure, being dragged down all at once by Europe – uncorrelated returns are coveted and hard to come by.  Litigation funding therefore offers an attractive opportunity for hedge fund managers as well as hedge fund investors.  However, litigation funding involves a litany of unique risks.  To help hedge fund managers, hedge fund investors and others unravel some of these risks and see more directly to the potential merits of the strategy, The Hedge Fund Law Report recently interviewed Kenneth A. Linzer, Esq., founder of law firm Hobart Linzer LLP.  We posed questions to Linzer on the following topics: the definition of litigation funding; types of investment managers and specific names active in the space from a sourcing and management perspective; the types of entities and specific names that invest in litigation or litigation funding vehicles; typical structures whereby investors in litigation make such investments; how to “value” litigation for purposes of equity-like investments; the “market” for key terms of debt-like investments in litigation; how to surmount the time issue; sourcing; due diligence; substantive legal areas that lend themselves to litigation funding; whether litigation funding has a role on the defense side; champerty; policy; and performance of the strategy.  The full text of our interview with Linzer is included in this issue of The Hedge Fund Law Report.

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  • Icahn Enterprises Employment Agreement with Top Executive Highlights Measures Hedge Fund Managers Can Take to Retain and Incentivize Top Talent

    Most hedge fund managers would agree that their most valuable asset is their talent.  Not surprisingly, therefore, managers spend significant time and effort trying to incentivize and retain key employees.  As in other areas of law and business, precedent is a helpful guide – especially precedent created and used by people at the top of the field.  Employment agreements used by top managers can be enlightening benchmarks when structuring compensation, retention mechanisms and similar provisions.  The problem is, such employment agreements are hard to get a hold of – except when they are publicly filed.

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  • European Court of Justice Invalidates French Withholding Tax that Applied Only to Dividends Paid to Non-Resident Open-End Investment Funds

    One of the fundamental goals of the European Union (EU) is to reduce barriers to economic activity between and among member states.  Barriers can include tax policies designed to advantage certain member states over other member states.  In that vein, the European Court of Justice (ECJ) recently considered whether France’s policy of imposing a 25% withholding tax on dividends payable by French companies to non-resident investment funds while exempting resident investment funds from withholding violates Article 63 of the Treaty on the Functioning of the European Union and thus creates an impermissible barrier to economic activity among member states.  This article summarizes the background and the ECJ’s analysis in this case.  The petitioners in the case are global investment managers that manage funds organized as Undertakings for Collective Investment in Transferable Securities (UCITS).  Thus, the ECJ’s analysis is directly relevant to UCITS managers, and it is also relevant to managers of non-UCITS investment vehicles with any nexus to Europe.

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  • Citi Prime Finance Survey Predicts Hedge Fund Industry Assets Will Nearly Double by 2016 and Highlights Opportunities for Hedge Fund Managers to Grow Assets Under Management

    Although hedge fund assets under management (AUM) appear to be on the upswing, many managers continue to struggle to raise and retain capital.  It is more critical than ever for hedge fund managers to understand the mindset of institutional investors and to seize upon opportunities to grow their AUM.  In that vein, in June 2012, Citi Prime Finance released its third annual survey of hedge fund industry professionals, entitled “Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence” (survey).  The survey provides valuable insight into the thinking of institutional investors (who are now the dominant allocator of capital to hedge funds) and other hedge fund industry professionals.  The survey also highlights historical trends in hedge fund asset allocation; predicts sizeable growth in hedge fund AUM by 2016; and describes various opportunities for hedge fund managers to grow their AUM.  This article summarizes the key business development takeaways from the survey.

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