Insights

  • June 16, 2017

    Legal and Compliance Considerations for Hedge Fund Managers Investing in the Cannabis Industry (Part One of Two)

    The unabashed use, growth, production and sale of marijuana has exploded in the last several years. Eight states and the District of Columbia now have laws allowing for the recreational use of marijuana, and 29 states allow the use of medical marijuana. From an investment management industry standpoint, the expansion of the market for cannabis has created a new category of potential investments. Private investment funds that focus on the industry have seen significant gains from their wagers on marijuana companies. Bets on marijuana companies helped Tribeca Global Natural Resources Fund, for example, earn an incredible 148% net return last year, gaining $200 million and becoming the overall top performing fund, according to Preqin. Considering the growth of the cannabis industry and the potential gains for fund managers investing in the space, the temptation to invest in cannabis-related companies is easy to understand. However, before doing so, fund managers need to be aware of the complex legal environment surrounding the industry and the hesitancy of certain service providers to work with cannabis-related companies. This article, the first in a two-part series, reviews the current state of the cannabis industry and clarifies federal and state laws regulating marijuana and how they may conflict. The second article in this series explores why hedge fund managers invest in cannabis companies, how funds are typically structured, how managers most often access cannabis investments and best practices for investing in the space. Read More »

  • June 16, 2017

    Key Considerations for Hedge Fund Managers Purchasing Fiduciary Liability Insurance

    Hedge fund managers rarely cite compliance with the Employee Retirement Income Security Act as among their top concerns, but the June 9 implementation of the Department of Labor’s long-delayed Fiduciary Rule, which raises investment advice standards for retirement accounts, provides a fresh opportunity to review the circumstances under which managers can find themselves subject to liability stemming from violation of ERISA’s heightened fiduciary duty standards and why they should insure against it. (For more on the Fiduciary Rule, see “Advisers Grapple With Implications of Fiduciary Rule’s ‘Investment Advice’ Ambiguity”) This article examines fiduciary liability insurance, why hedge fund managers should purchase a policy, the scope of coverage, and its structure and costs. Read More »

  • June 2, 2017

    Key Considerations When Contemplating Selling a Stake in a Hedge Fund (Part Two of Two)

    Selling or buying a stake in, or, in rare cases, the entire management company, can be an attractive option for hedge fund managers and potential acquiring partners for myriad reasons, particularly in an economic environment in which assets inflows are harder to come by: From the manager’s perspective, strategic buyers may afford managers access to larger sales and marketing opportunities and facilitate growth of the business. Alternatively, for institutional buyers like a bank or large investment management company, a hedge fund manager can offer a strong growth prospect and means to diversify product offerings. Regardless of the respective objectives of the parties to a transaction for the sale of a stake in a hedge fund, the buyer and seller must know what to look for in a potential partner and essential terms to negotiate to protect their interests and ensure the continued success of the business. This article, the second in a two-part series, addresses deal negotiations and terms, hedge fund valuation, obtaining investor consent, regulatory notifications and finalizing the deal. The first part explored reasons hedge fund managers decide to sell all or a portion of their business, common deal structures, recent hedge fund acquisitions and due diligence. Read More »

Legal Proceedings & Laws

  • June 16, 2017

    Legislation Update: Assessing the Potential Impact of the CHOICE Act on Private Funds Managers

    On June 8, 2017, the House of Representatives passed the Financial Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs Act, known as the Financial CHOICE Act, a bill intended to dismantle and replace the 2010 Dodd-Frank Act’s financial services industry reforms. The CHOICE Act’s scope is sweeping in nature and if implemented, the regulation would, among other things: grant banks deemed ‘healthy’ relief from certain regulatory requirements like stress tests, so long as they maintain minimum leverage ratios; repeal the Volcker rule, a Dodd-Frank provision banning banks from proprietary trading and severely curtailing their ability to sponsor or invest in hedge funds or private equity funds; strip the Consumer Financial Protection Bureau of its powers to write rules and supervise firms; repeal the Financial Stability Oversight Council’s authority to designate firms as systematically important financial institutions subject to stricter rules; and modify capital rules to allow banks more flexibility in how they guard against ‘operational risks.’ Although almost everyone agrees the bill faces long odds in ultimately becoming law, aspects of it could still be implemented by the Trump administration. This article summarizes the provisions of the CHOICE Act anticipated to have the greatest impact on private funds. Read More »

  • June 2, 2017

    SEC Charges Four in Medicare Insider Trading Scheme Involving Hedge Fund, Government Employee and Consultant

    On May 24, 2017, the Securities and Exchange Commission filed a civil complaint in federal district court in New York against four individuals alleging they participated in a year-and-a-half long insider trading scheme, from May 2012 through November 2013, trading advance confidential and nonpublic information regarding Medicare reimbursement rate changes. The SEC also alleges that the scheme resulted in over $3.9 million in illegal profits to a hedge fund, in addition to management and performance fees. (For more on insider trading, see “A Guide to Insider Trading Laws Across Jurisdictions: How Funds with Global Assets Can Implement Tactical and Compliant Policies and Procedures:” Part One and Part Two; and “Foley & Lardner Attorneys Discuss Insider Trading in Wake of Salman”) The complaint’s allegations highlight the line between professional relationships animated by quid pro quo dealings and prohibited insider trading and exactly how nonpublic information should not be disseminated to or obtained from close contacts and then used professionally. This article summarizes the SEC’s allegations. Read More »

  • May 19, 2017

    Pair of Enforcement Actions Shows SEC Scrutinizes Forms ADV for Both Major and Minor Misrepresentations

    On May 5, 2017, the Securities and Exchange Commission entered two separate orders instituting administrative and cease and desist proceedings and imposing sanctions against two registered investment advisers and their founders for inconsistent or false statements disclosed in their Forms ADV. Although the facts underlying each action are distinct, taken together, they show just how meticulously the SEC reviews each of advisers’ Form ADV representations—on their face, as compared to prior and later Form ADV filings and against outside information and research. This article summarizes the SEC’s allegations in each enforcement proceeding. Read More »

Conferences & Seminars

  • June 16, 2017

    Managing Performance Portability Challenges Following Mergers and Acquisitions

    The nitty gritty of carrying over, or porting, a track record from one firm to another can get lost in the chaos that frequently accompanies mergers and acquisitions in the asset management space in general, and the hedge fund space in particular. Integrating operations and personnel, and identifying legal issues unique to a new, combined entity can take center stage, but more often than not, the deal’s raison d’être is to realize synergies anticipated from, among other things, marketing new products using the separate entities’ past performance and AUM. Accordingly, managers must understand the restrictions that govern how they can present the combined firm’s track record. In a recent webinar entitled Performance Portability Challenges Related to Mergers and Acquisitions, ACA Performance Services partner Karen Foley, and Todd Healy, executive director at UBS Asset Management, explained the challenges associated with calculating and presenting performance track records after mergers and acquisitions and how to handle them. This article summarizes the key points from their discussion. Read More »

  • June 2, 2017

    Pepper Hamilton Seminar Addresses Licensing Requirements, Fund Structures and Other Considerations for Hedge Fund Capital Raising

    The ability to successfully raise capital is an important harbinger of a hedge fund manager’s long-term success and requires managers to make several prefatory determinations, including the development of an overall marketing strategy that determines whether the marketing function will be performed in-house or outsourced to a placement agent or third-party marketer. This consideration can be particularly consequential, because managers who engage or employ external or internal marketers who otherwise should be registered as broker-dealers, but are not, can be subject to stiff penalties, including rescission of the fund marketed. During a recent Pepper Hamilton roundtable, “Investment Management and Hedge Funds: What's Happening Now?,” experts discussed capital raising and licensing requirements and considerations for managers weighing whether to employ an in-house marketing team or outsource marketing to a third party. This article summarizes the key points of the roundtable most applicable to hedge fund managers. Read More »

  • May 19, 2017

    ACA’s 2017 Compliance Survey Covers Insider Trading; Business Continuity; Fees & Expenses; and SEC Enforcement Priorities

    ACA Compliance Group recently released the results of its 2017 Alternative Fund Manager Compliance Survey, its eighth survey outlining top-ranked regulatory examination focus areas and compliance issues facing hedge fund manager respondents. The survey covered four main categories of hedge fund concerns: the Securities and Exchange Commission’s priority focus areas, including funds’ compliance programs, conflicts of interest, and fees and expenses; the access controls managers employ related to material nonpublic information, such as information barriers, restricted lists and employee training; fund fees and expenses, including the types of fees charged to fund clients and controls, policies and procedures related to fund expenses; and business continuity and transition plans, and the specific controls firms have implemented to protect clients’ and investors’ interests in the event of a business disruption. ACA Compliance Director Danielle Joseph and Principal Consultant Tessa Carbone presented the survey results at a recent webinar. This article summarizes ACA's findings in the four main categories. Read More »

News

  • June 16, 2017

    Clinton Group’s George Hall Shares His Outlook on Deploying Quantitative and Fundamental Strategies in a Risk-Sensitive Market

    The global financial crisis that started in 2008 left a long-lasting imprint on hedge fund managers and their investors, fomenting an industry-wide aversion to volatility characterized by investors hyper-focused on risk and managers amending their strategies to perform under any market conditions, especially variable ones. Within this altered investment environment, managers are also prospecting for new approaches to finding and capitalizing on risk-sensitive opportunities. According to Clinton Group co-founder and chief executive officer George Hall, who spoke during the most recent New York Hedge Fund Roundtable monthly symposium, marrying a quantitative investment strategy with a fundamental approach can help produce a portfolio that performs well under any market conditions. This article summarizes key points from Hall’s presentation on his firm’s investment strategy and finding and taking advantage of risk-sensitive opportunities in the current investing climate. Read More »

  • June 2, 2017

    FINRA’s Latest Regulatory Notice Provides Firms With Guidance On Social Media, Digital Communications

    Social media has played an unprecedented role in redefining the way people connect—both with one another and with the businesses whose products and services they use. Although the impact of social media on the way hedge fund managers operate may be more uneven than it is on other businesses—hedge funds market their products to an extremely niche audience, and traditional sales channels, such as direct sales, consultants and third-party marketers, remain sufficient—regulatory agencies such as the Securities and Exchange Commission and the Financial Industry Regulatory Authority define the term social media broadly enough that even hedge funds must remain vigilant about its use, however infrequent. More applicable to hedge funds, perhaps, is the regulatory agencies’ focus on electronic communications, since regardless of the method, technology or medium, any form of client communication is subject to the same rules. In a recent Regulatory Notice, “Social Media and Digital Communications,” FINRA set forth guidance on how firms should communicate with their clients in the current environment in which the technology underlying communications and communication mediums regularly change. This article summarizes the relevant aspects of the notice as they pertain to hedge fund managers. Read More »

  • May 19, 2017

    Citco Survey Indicates Continued Fundraising Challenges for Managers, Benchmarks Sales and Marketing Efforts

    A survey recently published by Citco Fund Services and HFM Global sought to better understand hedge fund managers’ asset growth, distribution trends, and sales and marketing strategies in the prior 12 months, and prognosticate results in the near future. The survey results indicate that managers are still facing fundraising headwinds, but that they are slowly and steadily adapting to the new environment. This article summarizes the survey’s key points. Read More »

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