The Hedge Fund Law Report

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

Recent Issue Headlines

Vol. 5, No. 30 (Aug. 2, 2012) Print IssuePrint This Issue

  • Considerations for Hedge Fund Managers Looking to Join Managed Account Platforms (Part One of Two)

    Following the 2008 financial crisis, hedge fund investors expressed concerns relating to a lack of liquidity, transparency and control in investing in comingled funds.  This led to an increase in the popularity of separately managed accounts, which address these concerns while allowing investors to access the investment acumen of talented hedge fund managers.  Capitalizing on the popularity of managed accounts, financial institution sponsors have built managed account platforms that provide investors with access to a variety of managers.  The platform sponsor vets participating managers, serves as a gatekeeper of the platform and provides other services.  These managed account platforms have grown in popularity, particularly with institutional investors.  As such, many hedge fund managers have considered joining such platforms as a route to increased assets under management and visibility in the institutional investor community.  This is the first article in a two-part series designed to describe what managed account platforms are and to highlight the various considerations that hedge fund managers should evaluate in determining whether to offer their services through such platforms.  This first article surveys managed account platforms, including describing the various structures for managed account platforms; the evolution of managed account platforms; and the process for adding a hedge fund manager to a managed account platform.  The second article in the series will discuss why investors find managed account platforms attractive as a method for allocating capital; considerations for hedge fund managers evaluating whether to offer their services through a managed account platform; how managers should consider which platforms to join; and certain key issues to negotiate with a platform sponsor.

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  • Selective Dissemination of Research Through Surveys, Trade Ideas Platforms, Huddles and Desk Research: What Are the Implications for Hedge Funds?

    A July 15, 2012 article in The New York Times originally entitled “In Surveys, Hedge Funds See Early Views of Stock Analysts,” highlighted the topic of selective dissemination of research, alleging that hedge funds are getting early access to ratings changes through surveys and “trade ideas” platforms.  Not to be outdone, The Wall Street Journal published an article on July 25, 2012 titled “Stock Research, For a Select Few” which discussed trade ideas platforms and the rise of “desk analysts” who are not subject to the same dissemination requirements as publishing analysts.  While selective dissemination is a front burner issue for regulators, the compliance implications for hedge funds are less clear.  In a guest article, Sanford (Sandy) Bragg, CEO of Integrity Research Associates, LLC, describes various methods for disseminating research, including surveys, trade ideas platforms, huddles and desk research; reviews recent regulatory activity on and rules governing the selective dissemination of research, particularly as it relates to trade ideas platforms; and discusses how hedge funds might mitigate selective dissemination risks.

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  • China Launches Landmark Reforms Impacting Hedge Fund Capital Raising, Investments and Operations

    The Chinese government and securities regulators recently undertook a series of historic reforms aimed at dismantling regulations that separate China from international markets.  The first and boldest initiative, the Qualified Domestic Limited Partner Program, has vast potential to enable foreign hedge fund managers and other institutional investors to raise Renminbi (RMB)-denominated funds in mainland China.  See “Local Currency Hedge Funds Expand Marketing and Investment Opportunities, but Involve Currency Hedging and Other Challenges,” The Hedge Fund Law Report, Vol. 3, No. 1 (Jan. 6, 2010).  The second initiative, a trial scheme in the prosperous coastal city of Wenzhou, allows residents to invest funds abroad and facilitates the conversion of underground private lenders into loan companies servicing small and medium-sized enterprises.  The third set of reforms expands the Qualified Foreign Institutional Investor program, enabling foreign hedge funds managers and other institutional investors to invest more easily in Chinese markets.  The fourth initiative, the Renminbi Qualified Foreign Institutional Investor scheme, allows Hong Kong-based arms of major Chinese asset managers and securities companies to raise capital from foreign investors that can then be directly invested into mainland China’s markets.  On the flip side, The National People’s Congress is also proposing to implement significant regulations for private funds and their managers by amending the 2004 Securities Investment Funds Law.  This article summarizes key highlights of each of these initiatives.  See also “Questions Hedge Fund Managers Need to Consider Prior to Making Investments in Chinese Companies,” The Hedge Fund Law Report, Vol. 4, No. 21 (Jun. 23, 2011).

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  • Hedge Fund Side Letters: The View from the Fund Director’s Perspective

    Most hedge funds are asked at one time or another by certain investors to provide side letters agreeing to preferential dealing, investment or other strategic terms.  There are clear cases where a side letter would not be acceptable, e.g., it contains plainly egregious terms; has no legitimate purpose; or is clearly contrary to what the hedge fund or hedge fund manager is doing in practice.  In most circumstances, however, there is no black and white answer as to what constitutes an acceptable side letter term or where the line should be drawn.  In crafting a side letter term that is in the best interest of the hedge fund (and in particular, other investors in the fund), there is a difficult balancing act that managers must perform.  On the one hand, the side letter can be used to facilitate a large investment that attracts other strategic investors, which could benefit the fund and the execution of its investment strategy.  On the other hand, side letters generally raise various fiduciary and other concerns that must be addressed.  In a guest article, Victor Murray, an independent accredited director at MG Management Ltd., discusses: side letter disclosure; ERISA considerations relating to side letters; unsavory terms; shareholder actions relating to side letters; lack of statutory provisions; derivative actions; fraud on the minority; and best practices in relation to directors’ review of side letters.

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  • Survey by Hedge Fund Administrator Tzur Management Highlights Growth and Characteristics of Israeli Hedge Fund Industry

    According to a survey recently released by hedge fund administrator Tzur Management (Tzur), Israel’s financial services industry has experienced significant expansion in the past five years due to deregulation, securities and tax law reforms and structural changes in the institutional market.  This growth has been accompanied by the emergence of a growing and evolving hedge fund industry.  To gain insight into and guidance concerning the Israeli hedge fund industry, Tzur provided a questionnaire to more than half of Israel’s extant hedge fund managers, polling them on various aspects of their businesses and on their views on the industry.  This article summarizes the key findings from the survey.

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  • How Far Can Hedge Fund Managers Go in Criticizing Public Companies?

    Hedge fund managers that make public comments about companies can face legal and regulatory risks.  Depending on the nature and scope of comments, regulators may determine that public comments by hedge fund managers may constitute market manipulation, which is prohibited by Section 9 of the Securities Act of 1933.  In addition, the public companies discussed by hedge fund managers may file defamation lawsuits against such managers.  This article discusses a recent court decision on the scope of permissible public statements by hedge fund managers about public companies.  This article is particularly relevant to hedge fund managers whose funds hold short positions in public equity.

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  • McGladrey Expands Financial Services Presence in Connecticut

    McGladrey LLP, a provider of assurance, tax and consulting services, recently announced the expansion of the firm’s financial services investment practice in Connecticut.  For insight from the Financial Services Group at McGladrey, see “How Should Hedge Fund Managers Allocate Form PF Expenses Between Their Hedge Funds and Their Management Entities?,” The Hedge Fund Law Report, Vol. 5, No. 25 (Jun. 21, 2012).

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