Tag Archives: hedge fund attorney

Hedge Fund Attorney

21 Replies

What does a hedge fund attorney do for a start-up hedge fund?

A hedge fund attorney is the first service provider a start-up hedge fund manager will likely contact.  The hedge fund attorney will listen to the manager and discuss the investment program.  From here the hedge fund attorney will begin drafting the hedge fund’s offering documents and may also suggest the other service providers the manager should talk to (including the administrator, auditor, and brokers or prime brokers).  After the offering documents have been finalized, the hedge fund attorney will help the manager with many of the logistical items which need to be addressed before the fund begins doing business.

Once the fund has started trading, the hedge fund manager may need the hedge fund attorney to do the following items:

–    Blue sky filings
–    Provide updates on relevant hedge fund laws
–    Revise the offering documents if necessary
–    Draft side letter agreements for certain investors
–    Make 13F filings on behalf of the manager
–    Make Form SH filings on behalf of the manager
–    Consult with the manager if investors have certain needs
–    Consult with the manager to start a new fund
–    Review marketing and other promotional materials
–    Answer hedge fund related questions
–    Help prepare manager for investment advisor or commodity pool operator audits (if necessary)
–    Hedge fund due diligence, potentially

In addition to the above, the hedge fund attorney is going to be a resource for the manager and the fund on an ongoing basis.  Hedge fund lawyers that have been around for a while and who have launched all sorts of funds will have generally experienced most issues that will arise in the hedge fund context.

What else does a hedge fund attorney do?

Besides drafting offering documents for the client, a hedge fund lawyer needs to understand what is going on in the industry.  As such the hedge fund attorney will spend a good portion of his day researching issues for clients, talking with service providers to see what are the developing trends within the industry, talking with regulators to see what are some of the things they are focusing on, in addition to other items.  Your hedge fund attorney should have an ear to the ground and understand the issues that affect you from both a business and regulatory perspective.

Hedge fund attorney – boutique or big firm?

Hedge fund attorneys usually work for either (i) boutique law firms that focus on securities law or the investment management industry or (ii) very large regional or national law firms.  Generally both types of attorneys are competent, produce good documents, and have the requisite knowledge of the industry.  In general, you will be looking at a cost issue.  Hedge fund formation costs can be high and if you use a very large law firm the legal costs could be double or more.

If you are a very large fund which will have over a billion dollars in assets during the first year of operation, you are probably going to go with the very large law firms that have very good reputations for hedge fund work.  Funds smaller than this may decide to go with the boutique firm for cost savings purposes, but they may also decide to go with the large law firms if they feel that there is need to show “name brand” service providers in their offering documents.  This might be the case if these funds are going to be shopping around for very large institutional investors during the first six months of operations.

Another issue to consider is who will be your contact person at the law firm.  Many start-up hedge funds choose to go with the boutique law firm because of the direct access to partners.  At the large law firms, most client matters are handled at the associate level and the partner may only talk to the manager once or twice.

Above all, the most important item when choosing a hedge fund attorney is to make sure you are comfortable with the attorney and his knowledge of the industry.  When starting out, the hedge fund start-up process can take up to two or more months depending on the complexity of the project, so you will want to make sure you have a good working relationship with your attorney.

Blue sky laws and filings for hedge funds

9 Replies

The term “blue sky laws” refers, generically, to any of the securities laws of the individual states.  Each state has a set of laws on its books dealing with securities.  These laws have many similarities to the securities laws at the federal level (the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940 and the Investment Advisers Act of 1940); in fact, many of the state blue sky laws are based on the laws at the federal level.  The state blue sky laws are enforced by the state securities administrator which is the state’s enforcement agency – it serves a similar function as the SEC does at the federal level.  Additionally, the state securities administrator may work in conjunction with the SEC in certain matters.

There are two distinct instances when, in virtually all of the states, blue sky laws become applicable to hedge fund managers (even unregistered hedge fund managers).

Blue Sky Anti-Fraud Authority

The first instance is when the state administrator pursues an action (i.e. request information, etc.) against a hedge fund manager (even if the hedge fund manager is unregistered) pursuant to its anti-fraud authority.  While each state’s anti-fraud statutes will differ, they are all drafted very broadly to give the state administrator wide lattitude for going after potential hedge fund frauds.  However, under this authority, the state administrator can also go after honest hedge fund managers.  While uncommon, it may happen in certain instances.  If it does, you should contact an experienced attorney immediately.  For most all unregistered hedge fund managers, this should not be something to worry about.

Blue Sky Filing Requirements

The second and more common instance when blue sky laws are implicated is when a fund will need to make a “blue sky filing.” As a general statement, a hedge fund will need to make a “blue sky filing” in each state where one of its investors resides.  The filing will generally need to be made within 15 days of the date of the investment into the hedge fund and the investment manager will need to pay a fee which will usually range anywhere from $75-$300 or more.  (Please note: for investors from New York a manager will need to make the blue sky filing prior to an initial investment into the fund.  The New York filing fee is going to be approzimately $1,400.)

To make a blue sky filing, you will first need to provide your hedge fund attorney or your compliance consultant with a few items of information including:

1. state where the investor resides
2. amount of the investment (including the amount of all previous investments)
3. the minimum investment amount (can be found in the hedge fund offering documents)
4. the management fee (can be found in the hedge fund offering documents)

After recieving this information your lawyer will complete a Form D and a Form U-2 and will help coordinate the filing of these documents with the appropriate state administrator.  The lawyer will also send a copy of Form D to the SEC for filing.  Form D filings are searchable through the SEC Edgar search engine.

Blue Sky Questions

Question: Does the fund or the management company pay the blue sky filing fees?

Answer: Most all offering documents which I have seen specifically name blue sky filing fees as an expense of the fund.  However, if this is not specifically named as a fund expense in your fund’s offering documents, it will likely still be a fund expense as most fund’s have a general catch-all for expenses like these.  If you have any specific questions, it is best to get clarity from your attorney.

Question: Does a manager have to pay the blue sky filing fee to each state on a yearly basis?

Answer: This is a good question.  As with many blue sky questions, it will depend on the specific state.  Some states only require a one-time filing fee, other states require that the filing fee be paid on an annual basis.  New York is a combination of these two as its filing fee is good for four years.  Your attorney or compliance professional should be able to discuss this with you on a state by state basis.

Survey of hedge fund administrators

2 Replies

As a hedge fund attorney I am often asked for referrals to hedge fund administrators. There are many very good administration firms that I have worked with in the past – for both small and large clients. The administration firms I would recommend for a larger client are not necessarily the same firms I would recommend for smaller clients. For either small or large hedge fund clients I will usually give the client two or three different administrators to talk with. Ultimately a start up hedge fund manager must be comfortable with the contact person at his administration firm and must also be comfortable with the fees that the administrators will charge – after the hedge fund launch most hedge fund managers will be communicating more with the administrator than the lawyer so it is important that the manager has a good relationship with the administrator.

Below is a press release which details a recent survey of hedge fund administrators. The survey comes from the Global Custodian website and can be found here.

Uncertain Markets Fail To Dent Appreciation of Hedge Fund Administrators

LONDON (2 September 2008) – Despite industry-wide anxiety about market conditions, more hedge fund administrators than ever took part in the annual Global Custodian survey of client perceptions of service quality and value. Nearly 1,200 responses were received from clients of 56 hedge fund administrators.

“Despite the consolidation which has taken place in the industry, and difficult investment and financing markets, we still attracted responses for well over 50 hedge fund administrators this year,” says Dominic Hobson, editor in chief of Global Custodian. “This is only one measure among many of the buoyant conditions in the alternative investment administration industry. Our survey also picked up signs of capacity constraints, limits on client size, high rates of staff turnover and expansion into new territories. These are all problems of success. The industry is clearly in a rude state of health.”

Despite the challenges they face, the average scores awarded by clients to their administrators are also up across the board, fuelled by a response rate that surged 25% this year.

“However, the headline scores are not the sole measure of success in the survey,” adds Dominic Hobson. “There are also large differences between providers in terms of the number, size and types of client they seek to service, which is why we divided the providers into separate peer groups this year.” The new peer group rating category facilitates comparisons between providers of similar size and structure.

In the first peer group, consisting of the largest and most international administrators, Citco Fund Services continues to top the annual survey. On the biggest turnout of any provider, Citco raised its scores in all but one question, further cementing the company’s long-held domination of the top spot in the survey.

“This survey is recognized as the most important, comprehensive annual survey of our industry,” says William Keunan, Citco’s director, fund services. “We are delighted with the top rated accolade, in particular as it comes directly from so many of our clients.”

In the same peer group, scores also rose significantly at Citi, Fortis Prime Fund Solutions and PNC Global Investment Servicing.

Peer Group 1 – Overall Scores

Provider (Total Scores)

  1. Citco Fund Services 6.36
  2. Goldman Sachs Administrative Services 6.23
  3. IFS, A State Street Company 6.11
  4. PNC Global Investment Servicing 6.03
  5. HSBC Securities Services 6.03
  6. CACEIS 5.96
  7. Citi 5.76
  8. UBS GAM -Fund Services 5.75
  9. GlobeOp Financial Services 5.65
  10. Fortis Prime Fund Solutions 5.51
  11. JPMorgan Hedge Fund Services 5.14

Peer Group Overall 5.93

Administrators were divided into peer groups based on similar size and structure to facilitate comparisons among administrators

In the second peer group, which consists of smaller and often new providers with a limited international presence, scores rose significantly for AIS Fund Administration, CIBC Bank and Trust Company, Equity Fund Services and Fulcrum Fund Services, which recently agreed a merger with Butterfield Fund Services.

But it was Kaufman Rossin Fund Services that dominated the second peer group, with an impressive debut in the 13th consecutive annual survey. The company grew out of a Florida accounting firm, allowing it to grow without taking in third party investors or taking on acquisitions, and it is now larger than the average small provider, with more than $18 billion in AuA.

“These survey results clearly reflect that our strategy of controlled growth, hiring ahead of the curve and leveraging technology enables us to exceed the expectations of our clients and the industry,” says Jorge DeCardenas, a co-founding director at Kaufman Rossin.

“Our outstanding service professionals and increasing institutional client base means that KRFS is very well positioned to continue this growth while maintaining our reputation for service,” adds Keith Sharkey, a co-founding director at Kaufman Rossin.

In addition to Kaufman Rossin, several other firms made their debut in the survey as rated providers for the first time this year, including the publicly listed GlobeOp Financial Services and Quintillion (Ireland).

Peer Group 2 – Overall Scores

Provider (Total Scores)

  1. Kaufman Rossin Fund Services 6.59
  2. ATC Fund Services 6.59
  3. AIS Fund Administration 6.49
  4. Pinnacle Fund Administration LLC 6.44
  5. Fulcrum Fund Services 6.42
  6. Quintillion [Ireland] 6.31
  7. Equity Fund Services 6.28
  8. Kingsway Taitz 6.25
  9. Trinity Fund Administration Ltd 6.23
  10. CIBC Bank and Trust Company Ltd 6.08
  11. LaCrosse Global Fund Services 5.98
  12. Circle Partners 5.95
  13. OpHedge Investment Services 5.82
  14. Daiwa Securities Global Asset Services 5.64
  15. Spectrum Global Fund Administration 5.43

Peer Group Overall 6.15

Administrators were divided into peer groups based on similar size and structure to facilitate comparisons among administrators

Even as several firms featured in the survey in the past have consolidated, the number of rated providers rose from 20 to 26. Of the 56 providers for which responses were received, 39 received enough responses to be either rated or mentioned in the survey.

Responses increased 25% over last year to a total of 1,160 that could be fully authenticated.

In recent years, the custodian banks that have acquired hedge fund administrators have sought to adjust client lists in favor of larger and more profitable hedge fund and fund of funds groups interested in a broader array of services. At the same time, prime brokers have recognized that providing administration services can help attract and retain clients and counter the shift among hedge fund managers towards multiple prime brokerage.

“It would be surprising if the hedge fund administration industry continues to support such a large number of providers, and there is now evidence that a renewed round of consolidation is in the offing,” says Dominic Hobson. “However, the appetite to sell may be offset as well as encouraged by the depressed prices available. In any event, the buyers are likely to be different from the banks which dominated the acquisition process in the early years of this century.”

Despite the slowdown in merger and acquisition activity, the hedge fund administration industry also continues to spawn new and smaller providers through a mixture of back office spin-offs by fund management and trading houses and start-ups that aim to service the smaller funds that are being jettisoned by the major providers, or which reckon they can use expertise acquired elsewhere to support particular investment strategies.

“It is worth reiterating that, in spite of the testing conditions in the marketplace, more hedge fund managers than ever responded to the survey this year, and we were able to rate more service providers than ever before,” says Dominic Hobson. “This reflects not only the growing maturity of the survey, but also the larger role and increased importance of administrators as the hedge fund industry has attracted institutional investors.”

Although many administrators are controlled by banks, and there is demonstrable appetite among hedge funds for financing services, the number of hedge fund administrators interested in providing credit, leverage and securities lending services to clients remains small. Only six administrators were rated for credit and leverage in the survey.

However, the inclusion in the survey for the first time this year of questions on middle office services is a measure of the expanding role of hedge fund administrators. The middle office is a term open to various definitions, but the survey measures the performance of providers in terms of the usefulness of P&L reporting, efficiency of cash market trade confirmations, efficiency of OTC derivative trade confirmations, resolution of breaks unrelated to NAV calculations, ability to support multiple prime brokers, efficiency of OTC derivative processing (e.g. documentation management, expirations, re-sets etc.) and the sophistication of collateral management.

IFS, A State Street Company topped the first peer group in middle office services while Kaufman Rossin came out first among the second peer group.

“Five years ago the idea that hedge fund administrators would get involved in functions such as leverage, OTC derivative processing and collateral management was unthinkable at most firms, and controversial where it was not,” says Dominic Hobson. “But consolidation, more imaginative business strategies, a growing willingness on the part of commercial banks to challenge investment banks, and market circumstances are gradually eroding the barriers that once separated prime brokers, fund administrators and custodian banks. Chief among the factors at work is the anxiety of institutional investors in hedge fund strategies about exposure to the credit risk of the investment banks.”

The full results of the 2008 Global Custodian Hedge Fund Administration Survey appear in the Summer Plus issue of Global Custodian magazine. They are also available online (to paying subscribers only) at www.globalcustodian.com.

Contact:

Dominic Hobson, Editor-in-Chief, at [email protected] or +44 (0) 207 148 4280

Allison Cayse, Surveys Editor, at [email protected] or +1 513 574 0220

Muzaffar Karabaev, Survey Reprints/Research Enquiries, at [email protected] or +44 (0) 207 148 4289

Notes:

1. The Global Custodian Hedge Fund Administration Survey has been published annually since 1996.

2. A full list of revisions to the 2007 questionnaire can be found online in the surveys section at www.globalcustodian.com.

3. Providers were rated on a total of 71 questions divided into 12 service areas: client service and relationship management, value, fund accounting and valuation, investor services, reporting to investors, reporting to fund managers, compliance and taxation, corporate administration, fund structures, credit/leverage, middle office services and technology. Respondents graded their administrators on quality of service using a scale of 1 to 7, where 7 is excellent; 6, very good; 5, good; 4, satisfactory; 3, weak; 2, very weak; and 1, unacceptable. Scores were then weighted for the size and sophistication of the respondent and for performance on questions named as important in each service area by all respondents.

4. Global Custodian is the leading specialist magazine covering operational, administrative and distribution aspects of the securities, derivatives, fund management and institutional investment industries. The magazine is supported in each of its chosen areas of expertise by industry-leading surveys of the global custody, sub-custody, hedge fund administration, mutual fund administration, prime brokerage and securities financing businesses.