Tag Archives: hedge fund lawyer

Hedge Fund Law – Summary of Hedge Fund Laws and Regulations

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he following is a summary of the major laws which affect the hedge fund industry.  If you have any questions on how these laws impact hedge funds in general or your specific situation, please contact us.

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Securities Act of 1933 – the 1933 Act was enacted on May 27, 1933 as a reaction to the market crash of 1929. The overarching purpose of the act was to require that all “securities” be registered with the government (at the time the FTC). The Act provides some exemptions from this general requirement; for hedge fund managers, the most important exemption from registration is found in Section 4(2) which provides that securities will not need to be registered is they are sold in a transaction which does not involving any public offering. Continue reading →

Hedge Fund Attorney

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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.

The different “types” of activist hedge funds

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There are many different types of hedge fund strategies (which we will write about in greater detail soon). One hedge fund strategy is activist investing. Like any other hedge fund strategy, not all activist hedge funds are the same. I recently ran across the article below which details the different “type” of hedge fund activist investors. The article can be found here.

Understanding activist hedge funds

By Damien J. Park, President and CEO of Hedge Fund Solutions LLC
November 09, 2007

Although no one really knows for sure, it is estimated that there are over 10,000 hedge funds now managing close to $2.0 trillion in assets.

Fueled by investment flexibility, little SEC oversight, diversified returns not correlated with market movements and enormous amounts of capital continuing to flow their way, hedge funds are increasingly a major force in today’s equity and debt markets and, as a result, continue to create anxiety in boardrooms throughout the world.

Not surprisingly, chief among board concerns are the powerful, demanding and relentless activist hedge fund. These are the funds loaded with cash, often hunting in packs and using aggressive tactics such as proxy contests to drive out the leadership in targeted underperforming companies. Even in today’s shaky credit markets – and maybe even now more than ever, activist hedge funds are seeking to use their power to demand instant rewards and fundamental changes in corporate policy.

Since the beginning of this year, over 200 activist investors have publicly pushed for change in 333 companies across the United States in a mixed bag of industries and market capitalizations. Close to 40% of the time the activists demanded modifications to the corporate governance structure of a company while more than 45% of the time they called for transaction-related events to take place (Exhibit 1). Some of these situations have generated improvements in shareholder value while others were absolutely devastating to the company, its employees, and its stock price.

[For Figure_1_2, please see article]

So, not surprisingly, board members have begun to seek help from legal advisors, bankers, management consultants and others in an effort to understand how vulnerable their companies might be to these insurgents and contemplate preemptive measures to ward off unwanted attention.

In our experience, the best approach both to serve shareholders and to position companies for long-term strategic independence is to think and act proactively. Public companies apprehensive about the possibility of attracting disruptive shareholders misaligned with management’s longer-term perspective on enhancing shareholder value should begin by studying the various types of activist investor along with their motivation and methodologies for successfully driving alpha. Following this, board of directors, alongside management and their strategic counselors, can begin to diagnose their vulnerability to unwanted attacks and plan the appropriate course ahead.

[For Figure_2_3, please see article]

Categorizing the Agitators

On one end of the spectrum are the Constructive Activists. This type of investor is rarely found on the front page of the Wall Street Journal or highlighted in the gossip section of the NY Post. In fact, these investors prefer to fly-below-the-radar, working with boards and management teams to help unlock dormant value while preserving longer-term strategic initiatives for growth. Although a Constructive Activist may indeed see value in a business spin-off or substantial share buyback program, it is rare to see them request board representation as a means to promoting their interest.

At the other end of the spectrum are the Pure Activists. These investors often use the public domain as a forum for attracting attention to an underperforming stock and for exerting additional pressure on the company’s leadership to promote change. It is often argued that the investment philosophy of these activists is to simply plunder and move on. Running proxy contests for board representation in more than one company at a time is not difficult or uncommon for these event-driven investors.

Somewhere in-between lays two emerging classes of activist investor – the Operational Activist and the Reluctant Activist. The Operational Activist is best known for their desire and ability to introduce fair-minded and well-balanced managers into a particular investment for the purpose of enhancing shareholder value by helping improve the underlying business operations of a company. However, if the Operational Activist does not realize anticipated results in a reasonable timeframe, or believes greater value can be generated by executing different operating or financial strategies, it can be expected that board representation, management changes, and/or business divestitures will be promptly demanded.

The Reluctant Activist on the other hand is a fairly new breed of investor. This investor draws their ire from investment fatigue and often “informally” (read: does not file as a 13D Group with the SEC) requests the services of the Pure Activist to do the dirty work for them. Frequently, the Reluctant Activist is a large, deep value investor who has accumulated 10% to 15% of a company’s stock over an extended time. Although they still maintain their fundamental investment theory is sound, they have lost confidence for any number of reasons (i.e. excessive compensation not tied to performance, implementation of unnecessary anti-takeover provisions without shareholder approval, slower than expected operational improvements, etc…). Armed with little more than the Reluctant Activist’s investment hypothesis and ownership leverage, coupled with their reputation for successfully displacing board members and underperforming managers, the Pure Activist is virtually guaranteed demands will be taken seriously and changes to corporate structure will come about with the help of a little poking and prodding.

[For Figure_3_2, please see article]

The good thing is that, despite the proliferation of these influential and regularly antagonistic investment vehicles, incumbent board members and managers can act preemptively to avoid the costly disruptions of an unwanted assault. And although understanding the activist investor and the various methods used for obtaining what they want won’t be the only protective agent, it’s certainly a great place to start.