Tag Archives: san francisco hedge fund

SF Hedge Fund Events Week of April 16

This is a big week for hedge fund managers and service providers in San Francisco. The main event will be the Hedge Funds Cares event at the Bentley Reserve on Wednesday. On Tuesday the Bay Area Hedge Fund Roundtable will be hosting an event at the Sens. There will be many managers and service providers in town for these events so please come out and support the community.

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Bay Area Hedge Fund Roundtable Event

REMINDER! The Bay Area Hedge Fund Roundtable

Presents: Technology, Social Media and the Internet – Opportunity Anew or Déjà vu?

Featuring:

  • Isabelle Fymat – General Partner, Crosslink Capital
  • Glen Kacher – President, Light Street Capital Management, LLC
  • Brenden Smith – Managing Partner, Cypress Capital Management GP, LLC

Moderated by:

  • Dietrich Doerbeck – Morgan Stanley Equity Sales

APRIL 17, 2012 ♦ 3:30 PM ♦ SAN FRANCISCO, CA

REGISTRATION BEGINS AT 3:00 PM

Sens Restaurant

4 Embarcadero Center, Promenade Level

Admission is $25 – Cash only please, receipts will be provided.

♦ Cocktail Reception to Immediately Follow ♦

Please RSVP to [email protected]

Connect with BAHR via Linkedin

The Bay Area Hedge Fund Roundtable would like to welcome you to join our Linkedin page. Members can stay updated on upcoming events and can also provide ideas on current hot topics or future events which will benefit BAHR members. Please click on the below link to visit the BAHR page.

The Bay Area Hedge Fund Roundtable (“BAHR”) is an informal (and not for profit) organization of members of the Bay Area hedge fund community that was established in 2001. BAHR strives to provide intelligent, fresh perspectives from industry leaders on current developments and offer an open, casual environment where members can exchange information and expertise and further develop their relationships within the industry.

San Francisco Hedge Funds Care Event

A TIME FOR HEROES

11th Annual Hedge Funds Care San Francisco

Open Your Heart to the Children Benefit

Wednesday, April 18, 2012

4:30 – 9:00 PM

The Bently Reserve

301 Battery Street

San Francisco, CA 94111

Business Cocktail Attire

The West Coast Committee of Hearts and the San Francisco 49ers Foundation invite you to the 11th Annual San Francisco Open Your Heart to the Children Benefit on Wednesday, April 18, 2012. The evening will include cocktails, dinner, dessert, a silent auction, raffle, more than 20 local wineries pouring, and special appearances by the San Francisco 49ers including Players, Coaches, Alumni, and Cheerleaders!

For more information, please click the link or image below:

http://www.hedgefundscare.org/event.asp?eventID=61

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Cole-Frieman Mallon & Hunt LLP provides comprehensive services to hedge fund managers. Bart Mallon can be reached directly at 415-868-5345.

Hedge Fund State and Local Business Requirements

Compliance Guide for New Hedge Fund Managers

Like any new business a hedge fund manager must comply with state and local ordinances, and make local business filings.  However, when launching a hedge fund, a manager may become so consumed with preparing launch documents, opening prime brokerage accounts and, most importantly, meeting with potential investors that these formalities might be overlooked.  In response to numerous questions from our clients, we prepared this guide for managers located in New York, San Francisco, and Chicago.  Please contact your attorney if you have questions about these or any other locations.

Because most manager entities are formed in Delaware, but are operating in another state, it is necessary to register them in their home state; this process is also known as qualifying the entity to conduct business, or applying for authority to conduct business, in the state where they are located.  Additional requirements typically include state and local taxes, payroll and other employment matters and city business licenses.

A checklist and quick reference table are provided as links at the bottom of this post.  All forms, procedures, fees, taxes or other requirements discussed below are subject to change by the state and local authorities; this guide is not intended to be an exhaustive list of all possible requirements in these locations.   Please confirm any requirements with your attorney or the authority in question before making any filings.

New York, New York

New York State Authority to Conduct Business.  Delaware limited liability companies (“LLCs”) and limited partnerships (“LPs”) must apply for authority to conduct business in New York State by filing an Application for Authority (“NY Application”) with the Department of State – Division of Corporations, along with a Certificate of Existence (called a Certificate of Good Standing in Delaware) from the state of formation (“COE”).   New York requires that the COE is dated within one year of the date the NY Application will be filed.

New York State Certificate of Publication.  Once the NY Application has been certified by the Department of State, the manager must publish in two newspapers a copy of the application for authority or a notice related to the qualification of the entity.  Publication must be done in the specific newspapers designated by the clerk of the county in which the manager is located.  After publication, the printer or publisher of each newspaper will provide an affidavit of publication.  A Certificate of Publication with the affidavits of publication of the newspapers attached must be submitted to the Department of State – Division of Corporations.  The publication process must be completed within 120 days after the filing of the NY Application.

Please also see our post on the New York Publication Requirement.

New York State Workers’ Compensation.  Any business operating in New York State must have workers’ compensation coverage for all employees.  Employers can obtain a workers’ compensation insurance policy with a private carrier, with the New York State Insurance fund or through self-insurance.  Failure to carry workers’ compensation insurance constitutes a misdemeanor or a felony punishable by a fine of $1,000 up to $50,000.  The level of offense depends upon whether an employer has five or more employees and whether the violation is a first or a repeated offense.  The Workers’ Compensation Board may also issue a stop work order to any business that fails to obtain a policy or owes a fine to the Board.  Failure to keep the required records is punishable by fines of $5,000 to $10,000 for a first-time violation.

New York State Disability Coverage.  Any business operating in New York State with employees must also provide disability benefits coverage.  The law provides for the payment of cash benefits to employees who have become disabled because of injuries or illnesses that have no connection to their employment, and for disabilities arising from pregnancies.  The law allows, but does not require, an employer to collect contributions from its employees to offset the cost to provide this benefit.  Employers may obtain coverage through a private carrier, the New York State Insurance fund or through self-insurance.  Failure to obtain disability benefits coverage constitutes a misdemeanor, punishable by a fine of $100 to $500 and/or imprisonment for not more than one year.  Additionally, an employer without coverage will be liable for any benefits due to an injured employee.

New York State Unemployment Insurance.  Employers must file a Quarterly Combined Withholding, Wage Reporting and Unemployment Insurance Return with the New York State Department of Labor.  Generally, all employment performed for an employer is covered whether it is on a part-time, full-time, temporary, seasonal, or casual basis.  If all required parts of the return are not received by the due date, the return is considered delinquent.  The penalty for failure to file is the greater of $1,000 or $50 per employee listed on the latest quarterly return, up to a maximum fine of $10,000.

New York City Unincorporated Business Income Tax.  The Unincorporated Business Tax (the “UBT”) is imposed on partnerships and limited liability companies, which would include most hedge funds and investment managers.  The UBT is equal to four percent of taxable income allocable to New York City, but the net effective tax rate for hedge fund managers could be near two percent after tax credits and deductions.  This stems from the deductibility of local business tax payments on federal taxes, and a twenty-three percent credit for UBT taxes against New York City personal income liability.  At present, the New York City Administrative Code taxes fees earned by managers, but carried interest may be exempt.  To obtain some relief from this tax, managers located in New York City typically form a separate entity to serve as the general partner of their onshore funds, rather than having the manager serve as general partner.

New York City Commercial Rent Tax.  A business must file a Commercial Rent Tax Return if the occupied premises are located in Manhattan, south of 96th Street, and the annual or annualized gross rent paid for such location is at least $250,000.  This tax also applies to: (i) those who occupy space in buildings they themselves own, individually or jointly with another person other than a spouse; (ii) those who occupy space in buildings owned by corporations where they are an officer or holder of all or part of the corporation stock; (iii) a corporation, occupying space in a building that is owned by a subsidiary corporation or by a parent corporation; and (iv) a corporation, occupying a space in building owned by an officer or stockholder of the corporation.

New York City Waste Removal and Recycling.  A commercial business is required to dispose of its waste, including recyclable materials, through a private disposal company.  All businesses are required to recycle office paper, corrugated cardboard, magazines, catalogs, and newspapers.  Businesses must post signs notifying employees, and customers where relevant, about what and how to recycle and must place labeled recycling containers where waste is routinely discarded.  Usually the building management makes arrangements with a disposal company for removal of recycling and waste for the entire building.  Regardless of a building's recycling arrangements, every company is required by law to maintain separate labeled recycling bins for paper.  Fines will be levied for violations.

San Francisco, California

California Business Registration.  LLCs and LPs must qualify to transact business in California by filing an Application for Registration  (“CA Application”) and a COE with the California Secretary of State.   In addition, within 90 days after the CA Application has been filed, an LLC must file a Statement of Information (“SOI”) with the California Secretary of State.  Thereafter, the SOI is due every other year on or before the anniversary of the initial SOI filing. LPs are not subject to the SOI filing requirements.

California Franchise Tax Board.  Registered LLCs and LPs are subject to an $800 annual tax even if they conduct no business in California.  They may also be subject to an annual fee based upon total income from all sources derived or attributable to California.  Additionally, an entity that has members or partners who are not residents of California must file consents signed by the nonresident individuals and foreign entity members to show their consent to California’s jurisdiction to tax their distributive share of income attributable to California sources.  The LLC or LP must pay the tax for every nonresident member or partner who does not sign the consent.

California Withholding on Distributions.  LPs and LLCs must withhold 7% on distributions of California source income made to nonresident partners or members when distributions to a particular partner or member exceed $1,500 for the calendar year.  LPs and LLCs must withhold on allocations of California source income to foreign partners and members (payees) at the maximum applicable California tax rate.

California Payroll Taxes.  A business becomes subject to state payroll taxes upon paying wages over $100 in a calendar quarter to one or more employees.  Wages include cash payments, commissions, bonuses, and the reasonable cash value of noncash payments (such as meals or lodging) for services performed.  Once subject, an employer must complete and submit a registration form to the Employment Development Department (“EDD”) within 15 days.  After registering, a business will receive a State Employment Identification Number.  Employers must report wages paid, taxes withheld and pay unemployment insurance, state disability insurance and employment training tax on employee wages.

California Workers’ Compensation.  California Labor Code requires employers with at least one employee to carry workers’ compensation insurance.  Employers may finance liability for workers’ compensation through self-insurance, private insurance or through the California State Compensation Insurance Fund.  Failure to carry workers’ compensation coverage is a misdemeanor punishable by a fine up to $10,000 and/or one year in jail.  The Division of Labor Standards Enforcement can issue a stop order preventing an employer from using employee labor until coverage is obtained.

San Francisco Business Registration and Renewal.  Every person or entity doing business in the City and County of San Francisco must have a valid Business Registration Certificate (“SF Certificate”).  A certificate is required for businesses located outside of San Francisco that transact business or perform services within San Francisco.  The registration fee varies based on a business’s estimated annual payroll tax expense.

The SF Certificate is issued annually and must be renewed by February 28th of each year.  All businesses must report their taxable payroll tax expense, even if it was zero, as part of the Business Registration Renewal process.   Businesses meeting a specified payroll threshold (which may be adjusted each year) are required to submit an additional Payroll Expense Tax Statement.

San Francisco Payroll Expense Tax.  The tax amount is equal to 1.5% of a business’ annual San Francisco payroll expense.  The recently-passed Proposition Q raised the payroll tax exemption for small businesses whose payroll expense for the year is $250,000 or less and extended the applicability of payroll expense tax to include compensation for personal services paid to owners of LPs, LLCs and other entities.  If a business has at least four W-2 employees based in San Francisco, the amount of payroll included for each individual owner of a pass-through entity may be calculated under the “safe harbor provision” by adding to his or her base salary an amount equal to 200% of the average annual compensation paid to the W-2 employees of the pass-through entity whose compensation is in the top 25% of that entity's employees based in San Francisco.

Please also see our post on San Francisco Proposition Q.

San Francisco Assessor Tax.  A business entity’s property is reappraised annually.  This includes all property owned or leased by a business except licensed vehicles, business inventory, intangible assets or application software.  Businesses that receive a property statement from the Assessor’s Office or that own taxable property with a total cost of $100,000 or more must file a 571-L business property statement each year by April 1st.  The filing must detail the costs of all supplies, equipment, and fixtures, improvements, land improvements, and land and include other information requested on the form at each location.  The 2010 tax rate for business property was 1.159% of the value of assessable property.  Such value is determined based upon cost, tax, freight, installation and depreciation.

San Francisco Labor Laws.  Three San Francisco labor laws generally apply to all employers with employees performing work within the City of San Francisco.  First, the Health Care Security Ordinance requires for-profit businesses with twenty or more employees to spend a minimum amount on health care for each employee working eight or more hours per week in San Francisco.  The Paid Sick Leave Ordinance entitles all employees (no minimum) working in San Francisco to paid time off when they or family members are sick or need medical care.  It also sets a minimum rate of accrual for sick leave of 1 hour for every 30 hours worked; fractional accruals are not permitted.  Finally, San Francisco has a minimum wage of $9.79 per hour for all employees who work in San Francisco more than two hours per week.

Exemptions for Businesses Located within the Presidio.  The Presidio is an area in the city that is owned by the federal government.  The Presidio Trust Act explicitly gives the Presidio Trust immunity from state and local taxes, which extends to property interests of third parties under “leases, concessions, permits and other agreements associated with Trust properties.”  Under federal law only income and use taxes can be levied on federal enclaves.  Because the business registration fees and payroll taxes discussed above are not income or use taxes, businesses located in the Presidio are exempt from these requirements imposed on businesses located elsewhere in San Francisco.

Chicago, Illinois

Illinois Admission to Conduct Business.  An LLC must submit an Application for Admission to Transact Business and a COE authenticated within the last 60 days to the Illinois Secretary of State.  An LP must submit a similar “Application for Certificate of Authority” along with a COE authenticated within the last 30 days (either, the “IL Application”).

Illinois Department of Revenue Registration.  A business must register with the Illinois Department of Revenue to receive a Certificate of Registration and Illinois Business Tax number.  Registration must be completed before a business makes sales, or when it hires employees.  This certificate must be displayed in a prominent location

Illinois Unemployment Insurance.  If a business hires employees to work in Illinois, it must register with the Department of Employment Security (“IDES”) within 30 days of the date it starts doing business in the state to receive an Illinois Unemployment Account number.  On a quarterly basis, employers must file an “Employer’s Contribution and Wage Report” and pay contributions to IDES.  The penalty for failure to file the report is the lesser of $5 for each $10,000 or fraction thereof of the total wages for insured work during the period, or $2,500 for each month or part thereof of such failure to file the report.  The amount of the total fine is capped at the lesser of $5,000 or $10 for each $10,000 or fraction thereof of the total wages for insured work during the period.

Illinois Workers’ Compensation.  All employers must obtain workers’ compensation insurance, post a notice in the workplace listing the insurance carrier and workers’ rights, and keep records of work-related injuries.  Accidents involving more than three lost workdays must be reported to the Workers’ Compensation Commission.  Employers may be fined up to $500 for each day without insurance, with a minimum fine of $10,000.  The commission may issue a stop-work order for a knowing failure to carry insurance.  Corporate officers may be held personally liable and/or sent to prison.

City of Chicago Business License.  All persons who “conduct, engage in, maintain, operate, carry on or manage a business” in the City of Chicago must obtain a business license from the Department of Business Affairs and Consumer Protection (the “BACP”), unless exempted by state law or regulated by another license category.  Applicants must complete a Business Information Sheet listing the business name, a detailed business description,

square footage, address, ownership information, and Illinois and federal tax numbers.  Businesses operating in a properly zoned area will be automatically approved when applying; these businesses need only file a tax registration form with the city.

The business license must be posted in a conspicuous place.  In the event of a violation, the BACP may issue a notice, a cease and desist order and depending on the type of business, the BACP may also confiscate personal property or make an arrest.  Additionally, fines may be imposed ranging from $200 to $10,000 per day.

Chicago Employers’ Expense Tax.  Businesses that employ fifty or more full-time employees who perform 50% or more of their work per calendar quarter in the City of Chicago and who earn more than $900 in a calendar quarter must pay the Employers’ Expense Tax.  The tax is equal to $4.00 per employee per month.  In determining the number of employees, employees of a “unitary business group” will be combined, i.e., a group of people under common ownership or control, whose business activities are in the same general line and whose members are functionally integrated through centralized management.

To help managers keep track of the filings that they should complete we have created a checklist, please see Checklist for State and Local Business Filings.  For information on division contact persons that can help with information on how to complete the above filings, please see our Quick Reference and Contact Information guide.  If you have questions on any of the items in this post, please feel free to contact us.

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Cole-Frieman & Mallon LLP provides a variety of legal services to hedge fund managers including entity formation, general business issues, legal advice with respect to hedge fund seeding, employment matters and matters related to hedge fund formation.  Karl Cole-Frieman can be reached at 415-352-2300; Bart Mallon can be reached directly at 415-868-5345.

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Bay Area Hedge Fund Event | September 29, 2010

The Bay Area Hedge Fund Roundtable is having an event next week.  Cole-Frieman & Mallon LLP will be attending and we hope to see you there.  Details on the event can be found below.

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The Bay Area Hedge Fund Roundtable presents:

A Conversation About Global Investing Trends – One Year Later

FEATURING:

John Burbank of Passport Capital

Patrick Wolff of Clarium Capital Management

SEPTEMBER 29, 2010 SAN FRANCISCO, CA at 3 PM

Sens Restaurant at 4 Embarcadero Center, Promenade Level

Please RSVP to [email protected]

The Bay Area Hedge Fund Roundtable (“BAHR”) is an informal (and not for profit) organization of members of the Bay Area hedge fund community that was established in 2001.  BAHR strives to provide intelligent, fresh perspectives from industry leaders on current developments and offer an open, casual environment where members can exchange information and expertise and further develop their relationships within the industry.

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Bart Mallon, Esq. runs the Hedge Fund Law Blog and provides hedge fund legal services through Cole-Frieman & Mallon LLP. He can be reached directly at 415-868-5345.

Bay Area Hedge Fund Event | July 28, 2010

YOU’RE INVITED!

The Bay Area Hedge Fund Roundtable presents:

Due Diligence and Fraud – The Reality of Headline Risk

FEATURING:

Scott Adams – American Federation of State, County and Municipal Employees

Shaun Dalton – Formerly with Bernard L. Madoff Investment Securities and Stanford Financial Group

Olivia Robinson – Background Intelligence, Inc.

MODERATED BY JAY GOULD, PILLSBURY WINTHROP SHAW PITTMAN LLP

JULY 28, 2010 SAN FRANCISCO, CA

CHECK IN – 3 PM

PRESENTATION – 3:30 PM

Sens Restaurant @

Four Embarcadero Promenade Level

Admission is $25 – Cash only please, receipts will be provided.

Cocktail Reception to Follow

Please RSVP to [email protected]

The Bay Area Hedge Fund Roundtable (“BAHR”) is an informal (and not for profit) organization of members of the Bay Area hedge fund community that was established in 2001. BAHR strives to provide intelligent, fresh perspectives from industry leaders on current developments and offer an open, casual environment where members can exchange information and expertise and further develop their relationships within the industry.

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Hedge Fund Law Blog is sponsored by Cole-Frieman &  Mallon LLP which provides legal and hedge fund registration services to fund managers.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

San Francisco Hedge Fund Event | April 14, 2010

The Bay Area Hedge Fund Roundtable is hosting an event next week.  We have reprinted the information below.

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Bay Area Hedge Fund Roundtable

presents:

Reasonable Expectations:
Capitalizing On Secular Stock Market Cycles

Featuring:

Ed Easterling

Author of Unexpected Returns and Investment Manager

Ed Easterling is the founder and President of Crestmont Holdings, an Oregon-based investment management and research firm. Crestmont manages a fund of hedge funds and publishes provocative research on the financial markets at www.CrestmontResearch.com. Mr. Easterling has over twenty-five years of alternative investment experience, including private equity, financial markets, and business operations. He is the author of Unexpected Returns: Understanding Secular Stock Market Cycles, a contributing author to Just One Thing (John Wiley & Sons; 2005), and he co-authored chapters in Bull’s Eye Investing by John Mauldin. In addition, Mr. Easterling is a Senior Fellow at the Alternative Investment Center at SMU’s Cox School of Business in Dallas and previously served as a member of the adjunct faculty teaching the course on alternative investments and hedge funds for MBA students. Mr. Easterling holds a BBA in business, a BA in psychology, and an MBA from Southern Methodist University.

April 14, 2010  ♦  3:30 pm  ♦  San Francisco, CA

Registration begins at 3:00

Sens Restaurant @ 4 Embarcadero Center Promenade Level

Admission is $25 – Cash only please, receipts will be provided.

♦ Cocktail Reception to Immediately Follow ♦

The Bay Area Hedge Fund Roundtable (“BAHR”) is an informal (and not for profit) organization of members of the Bay Area hedge fund community that was established in 2001. BAHR strives to provide intelligent, fresh perspectives from industry leaders on current developments and offer an open, casual environment where members can exchange information and expertise and further develop their relationships within the industry.

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Bart Mallon, Esq. runs the Hedge Fund Law Blog and provides hedge fund information and manager registration services through Cole-Frieman & Mallon LLP He can be reached directly at 415-868-5345.

Proposition Q and Hedge Funds

San Francisco’s Proposition Q and its Impact on Hedge Fund Managers

Proposition Q Passes in a Landslide

On November 4, 2008, San Francisco voters approved Proposition Q modifying the city’s Payroll Expense Tax by a resounding 74% of the vote. This little noticed proposition, which went into effect on January 1, 2009, will impact many hedge fund managers and other businesses in San Francisco.

San Francisco’s Payroll Expense Tax

Companies with one or more employees within the City and County of San Francisco and a payroll greater than $250,000 are required to pay a Payroll Expense Tax to the city equal to 1.5 percent of their taxable payroll. In 2007, the Payroll Tax generated over $350 million in revenues for San Francisco. Prior to Proposition Q, the law was unclear about whether compensation for services related to “pass through” entities such as partnerships and limited liability companies was considered “compensation paid to employees” and therefore subject to the Payroll Expense Tax. In reality, for most hedge fund managers in San Francisco, this meant that the distributions made to owners of the company or partnership were not subject to the tax.

Effect of Proposition Q

Proposition Q clarified that such distributions for payments to partners/owners for work done in San Francisco must be included in the calculation of the Payroll Expense Tax. For example, if a hedge fund manager earns $5 million per year, pays $250,000 in salaries to its employees, and distributes $4 million in profits to its partners or owners, prior to Proposition Q only the $250,000 paid to the employees was definitely subject to the Payroll Expense Tax. Beginning in 2009, however, the entire $4 million paid to the partners or owners, will also be subject to the Payroll Expense Tax.

Lack of Guidance and Recommendations

Proposition Q garnered scant attention in the news media, and will no doubt catch many hedge fund managers by surprise this year. The website of the San Francisco Office of the Treasurer and Tax Collector provides almost no information for business owners about the proposition. We advise that hedge fund managers keep Proposition Q and the Payroll Expense Tax in mind when making employment and compensation decisions. In particular, managers should keep in mind the safe harbor provision when determining the owner’s own W2 compensation, as well as the compensation of the top 25% of employees. Managers should also consult with their tax advisors to anticipate the impact of Proposition Q on their 2009 Payroll Expense Taxes, and determine whether they need to adjust their pre-payments of those taxes.

To find out more about Proposition Q and other topics relating to compensation and employment law issues for hedge fund managers, please contact Karl Cole-Frieman of Cole-Frieman & Mallon LLP (www.colefrieman.com) at 415-352-2300.

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Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs Hedge Fund Law Blog and can be reached directly at 415-868-5345.

San Francisco Hedge Fund Industry Event

BAHR Panel Discussion on Global Investing Trends
By Bart Mallon of Cole-Frieman & Mallon LLP

The Bay Area Hedge Fund Roundtable convened again today at the Sens Restaurant in San Francisco to discuss the global investing trends and how those trends are affecting the hedge fund industry. The presentation was moderated by Ron Resnick (ConselWorks LLC) and included the following panel participants:

John Burbank (Passport Capital LLC)
John Shearman (Albourne America, LLC)
Matt Kratter (Kratter Capital LLC)
Patrick Wolff (Clarium Capital Management, LLC)

Overall the panel discussion was very interesting and I think that Ron did a very good job of moderating in a kind of “Meet the Press” type of way. The speakers all had interesting viewpoints and were able to keep the audience interested in the topics. Below I will give a very high level run-down of the major topics discussed – if anything does not make sense, it is likely a mistake in my hearing so please do not hold that against any of the speakers.

Additional note: this is not in any way an advertisement for any hedge fund and is not an offering of any interests in a hedge fund. I have never talked to any of the named speakers and everything I am writing below is on my own volition.*

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John Burbank

The discussion was started when Ron asked John was his fund was investing in. John said that he is now investing in the United States in the same stuff as he was before. However, he spent a good deal of time discussing liquidity and how it will affect investment decisions going forward. Central to his discussion were his views on deflation. He ended this part of the discussion by noting that governments (especially the U.S. government) has so many tools to effect the financial markets (in addition to simply printing money) and that many actions are driven by the current liquidity situation.

Matt Kratter

I infer that Matt started his own hedge fund last year because he was asked whether it was a good or a bad time to start a hedge fund within the last twelve months. He noted that it was not the best time to be on your own but that the times serve as a good proving ground that a manager can withstand market downslides. Matt talked about variability of inflation going forward and that he is currently net short. He thinks that multiples are likely to retract in the future.

John Shearman

John was asked whether investor’s hedge fund expectations have changed. He said that investor expectations have come down a bit, but beleives that the forcase for the future has never been better. Post 2008 he sees that there has been a shifting of power back to hedge fund investors and he mentioned two buzzwords – lower fees and transparency. While fees have not really come down recently, there have been huge gains made in expectations of transparency. This is especially true with regard to valuation and verification of assets. Hedge funds have made these changes and it is relatively easy for them to say yes to such requests (as opposed to requests for fee decreases).

John seemed to indicate that there is more opportunity for investors to come together and present a united front with regard to what they want to see in these vehicles, but it has just not happened. A central reason is that foundations and endowments (two of the largest groups of hedge fund investors) are not really in a position to be an agent of change because they are examining the funds they are already invested in. He also mentioned a general increase in separately managed accounts noting that the central driving force is the investor’s need for control of assets – liquidity without conditions.

Patrick Wolff

Patrick was asked point blank while his group did not do as well this year. He said that, unfortunately, they had the wrong investments this year and that the drawdown was not a result of their risk management policies and procedures. Patrick talked about macro themes including China, volitility, carry trades over the last year and the fundamentals of major government players (centrally China and the U.S.). He feels there is a current bubble in China which is likely to last in the near term. He thought that a major macro issue moving forward will be how the governments will continue to be involved in the credit markets. Patrick believes that the U.S. has huge off balance sheet liabilities.

Other Question and Answers

What are the major trends moving forward?

John Burbank – governments changing the rules of the game as it is being played. What is going to happen will be driven by governments subject to: the price of the dollar, commodities, or China.

Why did gold hit an all-time high today?

Matt Kratter – I don’t know, but this is a question which everyone is asking – even the garbageman.

How is capital flowing?

John Shearman – there are a lot of opportunities in hedge funds – lots of alpha and distressed assets. Macro discretionary is a good play right now and there is a lot of interest in commodities.

How is fund raising in this environment?

Matt Kratter – fundraising has been slow since last year but there is more activity at the margins. Fundraising will probably stay difficult for awhile.

Are investors more interested in the investment side or infrastructure side during due diligence conversations?

John Burbank – all investor due diligence is taking longer. Current investors are coming back and asking questions they should have asked earlier. It is now similar to 2003 – there is a lot of excitement. Which makes sense because investors essentially have three choices: mutual funds, do-it-yourself, or hedge funds.

[Someone mentioned that capital is not there for a start up and the question arose as to whether two guys and a Bloomberg really had a chance to raise capital in this environment. John said that start up managers should not be afraid to start out small – he started with about $1MM in AUM and slowly grew to $12MM after three years (his firm now manages over $2 billion). John emphasized that over time good managers will be able to demonstrate their strategy and if the numbers are good, investors will eventually find such managers.]

What about hedge fund regulation?

Patrick Wolff – over hedge fund regulation is not a huge deal. If you are registering with the SEC you are going to be required to do things that, as a good business, you should be doing anyway. The key to regulation is that it needs to be sensible. Regulation itself is not bad.

Questions from the audience

When Ron asked the audience if there were any questions there was a long pause. I eventually asked the panel what they thought about the headlines recently regarding the U.S. dollar and whether it would remain the world’s reserve currency. Patrick responded first that worry about the dollar is overhyped. However, he did note that his fund has had some investors request share classes in a different currency.** John noted the practical limitations of moving toward another currency and noted that if a government needs to get a billion U.S. dollars it can happen, but that wouldn’t be the case with other currencies.

Note on People Who I Met

After the panel there was time to discuss the presentation and do some networking. I had the distinct pleasure of talking with a number of people at the event, including:

  • Jenny West of Probitas Partners (fund placement services)
  • Mason Snyder of Catalina Partners (risk advisory to investment management industry)
  • Rosemary Fanelli of CounselWorks (regulatory consulting for financial institutions)
  • Ron Resnick of CounselWorks(regulatory consulting for financial institutions)
  • Maria Hall of M.D. Hall & Company (CPA services for small funds)

* If you are a named speaker and would like your name and information taken out of this article, please contact me.

** I am in the process of writing an article on this topic – if you are a hedge fund manager who wants to create another class of fund interests denominated in another currency, please feel free to contact me to discuss.

****

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs Hedge Fund Law Blog and has written most all of the articles which appear on this website.  Mr. Mallon’s legal practice is devoted to helping emerging and start up hedge fund managers successfully launch a hedge fund.  If you are a hedge fund manager who is looking to start a hedge fund or register as an investment advisor, please contact us or call Mr. Mallon directly at 415-868-5345.  Other related hedge fund law articles include:

Bay Area Hedge Fund Roundtable Event

Panel Discussion on State of Hedge Fund Industry

Yesterday afternoon (May 6th) the Bay Area Hedge Fund Roundtable, a group of professionals within the hedge fund industry, gathered for a panel presentation entitled “Change…Critical Legal, Tax, Acounting and Regulatory Updates You Need to Know.”  The presentation was moderated by Pamela S. Nichter (Osterweis Capital Management) and included the following panel participants:

Vincent J. Calcagno (Rothstein Kass)
Geoffrey Haynes (Shartsis Friese)
Tony Hassan (Ernst & Young)
Anita K. Krug (Howard Rice)

Presentations like these are great because they allow professionals to share insights into what is going on in different parts of the industry – many of the topics discussed allowed the panelists to really dig deep into the issues and provide some context to what is happening at both the regulatory and investor levels.  I took notes during the presentation and will summarize some of the main points discussed by each of the presenters (please don’t hold anything against the speakers if I mis-paraphrase or mis-interpret and as always nothing in this summary is tax or legal advice)…

Anita K. Krug

Anita discussed a number of the laws which have been discussed or proposed over the past 6 to 8 months including the following:

  • Barney Frank’s Recent Comments (see Reuters article)
  • Mary Shapiro’s Recent Comments (see Bloomberg article where Shapiro says she wants the ability to make rules regulating hedge funds)
  • Discussion of the Hedge Fund Transparency Act which was proposed in the Senate earlier this year (see also Overview of the Hedge Fund Transparency Act)
  • Hedge Fund Advisor Registration Act which was proposed in the House earlier this year
  • Geithner’s hedge fund proposals (see NY Times article for background information)
  • Discussion of the past short selling rules (see HFLB article) and the new short selling rules which will be closer to the old “uptick” rule (see SEC overview; note: I have not yet had an opportunity to thoroughly review these proposed rules)
  • European Rules which have been proposed which may have an effect on US based managers with EU investors (Anita raised many of the same issues which were also raised in this article)

Geoffrey Haynes and Vincent J. Calcagno

Geoffrey and Vincent went back and forth discussing some of the tax issues which managers are likely to face this year and potentially going forward.  This discussion included the following issues:

  • Discussion of the new offshore deferral rules by dint of new Section 457A of the Internal Revenue Code (see generally this alert).  Note: discussions on the ramifications of this new section to managers who currently have deferral arrangements took a majority of the time.  There are a number of issues involved including issues with side pockets, options, and non-conventional performance fee periods.
  • San Francisco Payroll Tax of 1.5% (see background on this issue here)
  • Discussion of the Levin proposal to tax the carried interest as ordinary income (see Hedge Fund Carried Tax Increase?).  [The panelists seemed to think that Congress would not vote on this bill until sometime in 2010 (if the bill was actually even voted on) with an effective date, if passed, of sometime in 2010 – the panelists did not seem to think it would be retroactively applied.]
  • Discussion of a bill which would eliminate UBTI for U.S. based non-taxable investors investing in U.S. hedge funds which utilize leverage (note: I was not aware of this bill and am not sure what bill exactly was referred to – please feel free to contact me if you know about this bill).  The panelists seemed to think this bill was likely DOA.
  • Discussion of the Stop Tax Haven Abuse Bill by Senator Levin (see Senator Levin’s press release)
  • Discussion of Obama’s Offshore Tax Plan (see generally the White House press release)

Tony Hassan

Tony discusses what is changing in the area of hedge fund operations.  Tony’s discussion of current topics was maybe one of the more important parts of the panel in terms of providing insight on current investing trends and due diligence requests.  Many of the items in this section were part of a dialogue between Tony and Vince as noted in the parenthesis below.

  • There is no secret that due diligence is a more central and important part of the investing process than it was previously.  (Tony and Vince)
  • Due diligence is also changing in many respects – at E&Y Tony has had specific requests from potential invests to send them directly the financial statements.  Of course this brings up many legal and client issues (the hedge fund, not the potential investor, is the client of E&Y) and because of this these requests are often denied. (Vince)
  • Managers are providing verified transparency “quarterly reviews” which aim to show investors that the fund’s assets are actually there.  (Vince)
  • Some funds are instituting a half-yearly audit (in addition to the end of year audit).  (Vince)
  • Some funds are instituting agreed upon procedure reports.  In these reports the auditor will come in an verify that certain procedures are being completed.  This may be especially important with regard to the valuation of the fund’s assets.  (Vince)
  • Tony noted that this is really a new form of due diligence and used the term “Hedge Fund Due Diligence 2.0” – a term I used in October of 2008 (see post).
  • Investor questions to hedge funds are changing.  While previous questions would have stopped after “Do you have a 3rd party administrator?”  Now the questioning continues – investors want to know about the administrators technical expertise, who exactly will be the account representative and what type of capital markets experience does that person or group have, what inputs will be used to value assets, etc.  Investors also want to know what sort of contingency plan is in place should the administrator fail or if there is a disaster; investors will want to know if the fund is keeping shadow books.  (Tony)
  • Tony also participated in the discussion with Pamela below with regard to managed accounts.

Pamela S. Nichter

Pamela, the moderator of the discussion, also weighted in on certain operational issues which fund managers should be prepared for in the new climate.  In general Ms. Nichter is seeing more investor requests and communications.  Now there is greater communication between the investor and the fund manager.  Ms. Nichter also discussed the trend toward greater liquidity and transparency through separate account structures.

Separate accounts are something that more and more investors are seeking but there are many considerations for managers.  Specifically separate accounts can be a drain on resources, especially if the investors request their own specific administrators or auditors.  Because of the greater amount of resources which need to go into the back office to handle what is in essence a more traditional asset management business, the manager must be ready to change the business model to a certain extent.  Specific issues will include:

  • having a robust trade allocation policy
  • understanding that there is likely to be a disparity of performance
  • potential registration issues
  • potential integration issues
  • performance reporting issues (may need to go back to GIPS)

Questions and Conclusion

After the panel finished their discussion the floor was open to questions.  During this time there were a number of good questions.  One issue focused on what will performance fees look like going forward which led to a discussion about creative performance fees (like instituting some sort of clawback provision like what is found in private equity funds).  Another issue was whether and to what extent the Managed Funds Association will be representing the industry during this time of legislative/regulatory changes.  The answer is that the MFA will be doing everything it possibly can to represent the hedge fund industry and it is our job to make sure that the MFA knows how the industry feels about many of the current legislative proposals.