• August 11, 2017

    Preserving A Hedge Fund’s Business and Legacy: The Keys to A Robust Succession Plan

    Developing a thriving hedge fund business, as distinguished from a traditional corporation, involves fostering a network of interpersonal connections because investors often decide to allocate to one manager over another at least in part due to the strength of a personal connection. In some cases, a manager’s reputation attracts investors as much as the potential returns its funds can produce. Despite this relationship-centered model, investors are increasingly requiring managers, especially smaller firms, to show that they have a sustainable business model, or succession plan, in place that will outlast the founder, key man or portfolio manager they have a personal connection with to ensure that those who remain at the firm will maintain and grow its business and performance uninterrupted. In addition to mollifying investors, succession plans can help hedge fund managers strategize about the future of the firm, in order to preserve the manager’s legacy and the value of the business. This article explains the succession plan’s purpose and applicable regulatory expectations, provides guidelines on how hedge fund managers should craft a succession plan and reviews key elements of the plan, such as the primary employee positions the plan should cover, preparing employees to take over key roles, documenting the plan’s contingencies and what investors look for when they evaluate hedge fund managers’ succession plans. Read More »

  • August 11, 2017

    Understanding the Role and Duties of Hedge Fund Directors: A Discussion with Appleby Partner Alex Brainis

    Investors and regulators have increased their focus on the quality of governance on hedge fund boards in recent years. As the composition of hedge fund allocators has shifted from high net worth investors to institutional investors, the latter have expanded the purview of traditional due diligence on hedge fund managers to encompass evaluation of board governance, as well as directors’ experience and oversight of risk management, valuations, operational controls, transparency and the investment process. According to some sources, the results of the heightened review have become almost as important as managers’ performance. Institutional investors, seeking to standardize governance practices across hedge funds, have also lobbied regulators for additional investor protections. The Cayman Islands Monetary Authority, the primary financial regulator in the top offshore hedge fund domicile, in particular, has responded. CIMA has issued guidance on the roles and duties of hedge fund directors that sets forth best practices and establishes minimum governance standards for fund boards. In addition, in 2014, CIMA promulgated the Directors Registration and Licensing Law, which sets registration obligations for directors of most Cayman hedge funds and licensing requirements for “professional directors” appointed to 20 or more boards. In light of investors’ and regulators’ attention on hedge fund boards and governance standards, The Hedge Fund Legal & Compliance Digest recently sat down with Alex Brainis, a partner in Appleby’s Cayman Islands-based funds group, to discuss the role of hedge fund directors, oversight, the duties directors owe to both funds and managers, decision-making models for boards and the regulatory standards applicable to hedge fund directors. Read More »

  • July 28, 2017

    How Hedge Fund Managers Engaging in Cross Trades Can Craft Effective and Compliant Policies and Procedures

    Executing cross trades—transactions between two funds run by the same hedge fund manager or between a manager and its funds—sometimes can be more effective and cost-efficient for managers and investors than transactions executed with third parties. Although there are no legal prohibitions on such transactions, cross trades are coextensive with certain conflicts of interests that must be managed. In particular, cross trades must be executed in accordance with managers’ fiduciary obligations, disclosures to regulators and investors, and compliance policies and procedures governing the transactions. This article explains cross trades and identifies the common situations in which managers execute them, issues that arise in conducting a cross trade, necessary regulatory and investor disclosures, policies and procedures managers should implement to assure cross trades are properly executed and fair to both parties, and remedial steps managers should take in the event a cross trade is improperly executed. Read More »

Legal Proceedings & Laws

  • August 11, 2017

    SEC Charges Adviser with Failure to Disclose Conflicts and Custody Rule Violations

    The Securities and Exchange Commission recently entered into an agreement with a registered investment advisor and two of its principals, settling charges that they failed to disclose to investors that they deployed a portion of one fund’s assets into a second fund whose purpose was to grow the firm’s investment advisory business. The deviation from the first fund’s stated investment strategy resulted in a conflict of interest that required investor consent since the firm acted as general partner for both funds, and the adviser and its principals stood to benefit from the reallocation of the first fund’s assets. In addition, the auditor the firm hired to audit the funds’ financial statements was not qualified under the Advisers Act’s custody rule, and the firm failed to distribute audited financial statements to the funds’ investors by the custody rule’s annual deadline. This article summarizes the SEC’s allegations. Read More »

  • July 28, 2017

    SEC Sanctions Firm For Overvaluing Assets on Financial Statements, Results in Custody Rule Violations

    Recently, the Securities and Exchange Commission entered into an agreement with a registered investment adviser settling charges that the firm and two of its principals materially overstated the value of two private funds they advised, which precipitated a chain reaction of subsequent misstatements in fund financial statements, management discussion and analyses sent to investors and Form ADV filings, and Custody Rule violations. The overstatements stemmed from the firm’s unreasonable assumptions about the value of an asset in which both funds were invested and the value of a loan made from one fund to the other which would never be collected. This article summarizes the Commission’s allegations. Read More »

  • July 14, 2017

    Private Fund Manager Faces Sanctions for Borrowing From Funds Without Express Investor Disclosures, Though Funds Were Repaid

    On June 29, 2017, the Securities and Exchange Commission sanctioned a registered investment adviser and its chief executive officer for improperly borrowing money from the RIA’s three private equity funds and causing the funds’ general partners to not make timely capital contributions. All told, the SEC determined that the firm misappropriated nearly $10 million during a three-year time period until a new chief financial officer and chief compliance officer ascertained the borrowings were not authorized by the funds’ governing documents, and the firm repaid their borrowings. Notwithstanding their redress, the SEC sanctioned them. This article summarizes the SEC’s allegations. Read More »

Conferences & Seminars

  • July 28, 2017

    Business Continuity Plans: Regulatory Expectations and Key Elements for Hedge Fund Managers

    Developing a business continuity plan is already required of registered investment advisers but the Securities and Exchange Commission is elevating its scrutiny of firms’ resilience and recovery strategies following its June 2016 proposal of a new rule explicitly requiring that registered investment advisers adopt and implement written business continuity plans amid heightened risks of terrorist and cybersecurity attacks and severe weather globally, and more quotidian internal technological glitches. Regulators, and also investors, want managers to demonstrate that they can effectively and reliably manage investors’ assets regardless of the contingency—internal or external—that threatens operations. Eze Castle Integration recently hosted a webinar that highlighted top considerations and best practices for hedge fund managers developing a robust business continuity plan. This article summarizes the webinar’s key points. Read More »

  • July 14, 2017

    Setting up Shop in Dubai: Fund Structures, Distribution and Regulations

    The hedge fund market may have reached maturation in more traditional economic centers, like the U.S., the UK and Europe, but pockets of potential exist in markets experiencing a confluence of factors that make them ripe for growth, including low asset management penetration, a large number of wealthy prospects and a regulatory regime that encourages both investors and investment managers to confidently participate in the market. Dubai represents one such pocket. The Dubai International Financial Centre—a special economic zone created in 2004—working in conjunction with the Dubai Financial Services Authority, has sought to modernize its regulatory regime to create a more conducive ecosystem for Middle Eastern capital to remain in the Middle East via funds located in the DIFC. As those efforts have begun to bear fruit, resulting in a near doubling of the number of registered funds in the economic zone over the past 12 months, K&L Gates recently hosted a seminar entitled, “Funds & Structures in the Dubai International Financial Centre,” to discuss the regulatory environment and demographics that make the center an appealing option for managers looking to grow their AUM and what managers can expect from setting up a fund in the DIFC. This article summarizes the highlights from that seminar most relevant to hedge fund managers. Read More »

  • July 14, 2017

    Morgan Lewis Annual Hedge Fund Seminar Highlights Current Trends in Trading and Investment Practices and Research Methods

    Activist investing has grown considerably over the past few years as the strategy has been embraced, gradually at first, and then with more verve, by diverse asset managers and institutional investors, but by hedge fund managers in particular. In a report published in late 2016, a full 84% of activist funds surveyed expected the level of hedge fund activism to increase. During Morgan Lewis’ 10th annual “Advanced Topics in Hedge Fund Practices Conference: Manager and Investor Perspectives,” the firm’s partners discussed their insights on current trends related to trading and investment practices, with a particular focus on activist investing, and changes in research methods emerging in anticipation of proposed regulatory amendments and MiFID II requirements. This article, the second in a series of articles covering the conference, provides a comprehensive summary of the aspects of the panelists’ discussion most relevant to hedge fund managers. The first article in this series summarized the panelists’ views on the current market for hedge fund terms and trends in direct lending. Read More »


  • August 11, 2017

    OCIE Risk Alert Stresses the Importance of Ongoing Cybersecurity Preparedness

    Cybersecurity remains, undoubtedly, one of the primary concerns among business leaders these days, and right alongside IT departments, legal and compliance teams feel the brunt of the pressure on organizations to prevent and/or mitigate the legal, regulatory, financial and reputational consequences of a cyber breach. Indeed, a recent survey of investment advisers confirmed that cybersecurity remains the “hottest” compliance topic. The SEC has spotlighted cybersecurity for years, beginning, officially at least, in 2014, with the first cybersecurity initiative conducted by the Office of Compliance Inspections and Examinations, and continuing with its ongoing release of guidance advising registered advisers on the steps they should take to secure their networks and systems and the seriousness with which they should treat cyber threats. On August 7, OCIE released its most recent cybersecurity memorandum—a Risk Alert detailing issues staff identified during the regulator’s second cybersecurity initiative. This article summarizes the alert and OCIE’s most up-to-date cybersecurity observations. Read More »

  • August 11, 2017

    Investors Committed to Hedge Funds and Negotiating More Favorable Terms, Credit Suisse Survey Finds

    Investors, who remain committed to hedge funds and are optimistic about the industry’s performance, have continued to negotiate more investor-friendly terms with the hedge fund managers in which they invest, found Credit Suisse’s “Mid-Year Survey of Hedge Fund Investor Sentiment.” The survey also found that investors still have a strong appetite for hedge funds and plan to continue their allocations to the asset class. In fact, investors’ demand for the asset class has increased, and more allocators plan to boost their exposure to hedge funds than reduce it this year, a somewhat surprising turnaround from last year when more investors planned to redeem investments in hedge funds. This article summarizes the key findings of the survey. Read More »

  • July 28, 2017

    SEC Chair Clayton Outlines Principles Guiding His Tenure at Helm

    On July 12, recently-confirmed Securities and Exchange Commission Chairman Jay Clayton gave a speech to the Economic Club of New York that set forth core principles that will guide his leadership along with specific practices the regulator will implement to effectuate those principles. While echoing the assessment his predecessor, former Chair Mary Jo White, made in January 2017 during her last public speech at the same venue, that the SEC “is today a stronger protector of investors than ever before and much better equipped to meet the challenges of the fast-paced, complex and interconnected securities markets of 2017,” Chairman Clayton proffered that he has “inherited an agency with considerably more discretion over its agenda” than former Chair White had during her tenure in the wake of the Dodd-Frank reforms. To that end, Chairman Clayton emphasized that the SEC will focus on disclosure-based rulemaking; technological innovation, including machine learning and AI tools; the costs of compliance with rules promulgated, including costs of implementation and examinations; cybersecurity; coordination among financial services industry regulators; market structure; capital formation; the DOL Fiduciary Rule; and consumer education through materials distributed by the SEC. Chairman Clayton did not specify a focus on private fund regulation, but his speech did include valuable insight into the direction of the SEC under his leadership. This article highlights the key points of Clayton’s speech most applicable to hedge fund managers. Read More »

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