All About Hedge Fund Law Firms
The hedge fund sector operates in a unique landscape and hydraulic environment. It has experienced exponential growth in the last decade, but with that comes a myriad of challenges. Hedge fund law firms can help you understand the intricacies and navigate complex laws and regulations. Why are hedge fund law firms so important?
Hedge funds are exceedingly important to the financial sector as they are considered hedge investments that are put in place to hedge risks in other assets. In effect, hedge funds offset potential losses in other areas of the portfolio, so they are spent primarily on not taking risks, which is the exact opposite of other investments in the market. Hedge funds are managed by individuals or investment firms that have one objective in mind: to achieve the highest possible return on investment (ROI) for whichever group they work for, be they individuals or large groups .
Hedge fund lawyers or attorneys focus primarily on advice and compliance, which may vary from the requirement of each country to another. In some countries, hedge fund lawyers also offer services and advice to managers on the structures and documentation to launch private funds or hedge funds. They may also help high net worth investors and institutional private equity groups with investment in hedge funds, developing distribution and implementing strategies.
Hedge fund law firms operate globally and can tackle any area of law. Their expertise comes from private funds, including US fund structures, asset management, life settlements and equity swaps. Whether you need representation for offshore and domestic funds, hedge fund lawyers have the knowledge and experience to handle whatever your company needs.
Areas of Concentration
The main areas of expertise offered by hedge fund law firms are fund formation, regulatory compliance and investment management. Even with all the complexities that these services encompass, they typically all fit within the same parameters. Firms can either offer one, two, or all three areas of expertise. Fund formation is the first process a hedge fund will undergo. The firm will need legal help to navigate the difficult waters of fund formation, which usually involves having to determine the most appropriate jurisdiction and type of fund to form, followed by a sound structuring of the fund based on strategic objectives. Offering documents will then need to be created, as well as relevant documentation for fee structures and fund managers. Fund managers also benefit from legal assistance for compliance with registration, securities laws and tax matters. Regulatory compliance comes into play as soon as the fund has been formed. Registration and compliance structures will need to be implemented and monitored continuously. Since hedge funds are unregulated, the information and documentation on compliance are important for investors and firms that manage a large number of investors. Investment management is a main concern for hedge funds. Issues concerning investments should be closely monitored and managed accordingly. Technical knowledge is a necessity when it comes to investment management, making it hard to acquire support for investments on your own. Management must be located for site visits, compliance updates and accounting, while liquidity issues must also be monitored. Legal assistance is beneficial for these purposes as well, ensuring everything runs smoothly and that the fund is doing everything according to law and ethics.
Compliance and Regulations
Regulatory compliance is crucial for hedge fund law firms. They need to possess strong capabilities in order to help their clients – the hedge funds themselves – to comply with the voluminous and stringent regulations to which they are subject. The need for this assistance from the law firms is especially great following the 2008 financial crisis. The fallout from the crisis, partially attributed to insufficient regulatory oversight, spurred an overhaul of regulations for hedge funds and many other financial institutions, most notably through the Dodd-Frank reform package. These reforms necessitated new and enhanced duties for hedge fund law firms, as their clients were forced to transition from their previous regulatory environment into one that is even stricter and more burdensome. Dodd-Frank itself, however, is an indication that complying with rules imposed by the Securities and Exchange Commission is only part of the problem with which hedge funds are dealing in relation to regulation. Other agencies, such as the Federal Reserve and Federal Deposit Insurance Corporation, have laid out rules that must be followed by banks, which also apply to some hedge funds that have either borrowed from banks or registered as bank holding companies. Alternative investment funds that invest in commodity futures option contracts likewise have to answer to the Commodities Future Trading Commission. Regulation at the SEC level is inherently transitory. The commission is designed to oversee all financial products and eliminate risks where they exist, as well as regulating entities that are employed in the trading of these products. This last element can make it difficult for hedge funds to cut through the clutter of regulations and ascertain what they actually need to comply with. For instance, a fund that invests in non-listed futures contracts is governed by the requirements of the CFTC and may not require registration with the SEC.
Investment Advisory
The interaction of hedge funds and securities regulation is complicated, so much so that it is usually necessary to seek a lawyer with specific experience and knowledge in the area. Highly specialized lawyers have traditionally formed specialized hedge fund law firms that provide comprehensive services to hedge funds and their investors, either acting only for one side or representing both sides in a transaction.
In the recent past some investment companies emerged which provided in-house legal services for a single client in a particular niche. The difference in services provided did not typically affect the overall cost of using an in-house lawyer to provide a full range of consulting services.
Traditionally, hedge fund law firms have represented hedge funds to assist professionals with regulatory rules, claims, and transactional work relating to investors and the securities markets. Regulatory compliance is a major role for this type of law firm, assisting with fund governance, event driven transactions, and day-to-day advisement on investor issues and compliance with investment terms and restrictions.
Hedge funds and other private strategies have become increasingly popular over the last three decades. The move toward fee-based revenue and the cost of management fees has led hedge funds to negotiate their own fees with service providers, which may lead to a very different contract than would ordinarily be written for a mutual fund.
Hedge funds tend to contract with a third party administrator, custodian or a central administrator or custodian for the purposes of fund administration and accounting services, clerical and recordkeeping, regulatory and financial reporting, compliance, record management and auditing.
For funds that operate in a global market, special care must be taken to ensure that investment management law is properly interpreted to avoid penalties or unforeseen circumstances which could hamper the operation of the business.
Hedge fund law firms play a vital role in the business of investment management.
Selecting the Optimal Law Firm
When choosing a hedge fund law firm, you should look for someone who has experience in the industry. If a firm does not have lawyers who have worked in the hedge fund industry in the past then it is likely they do not have many clients who are in that industry. Without having personally worked for a hedge fund, a lawyer might not be able to comprehend all the actual issues that hedge fund managers face generally.
The lawyer you choose should also have specialization in your line of business. Meaning the lawyers working on your fund should be experts in the subject matter that is most important to your business. There is a lot of overlap with funds and their needs, meaning a law firm may have experience across the hedge fund industry but not necessarily an expert in a niche area that your fund may need. Find a firm that specializes in your industry.
In addition to finding a firm that has expertise in your general area, you should try and find a firm that has experience working with your officers . Many times the investment officer for a hedge fund has their own personal or investment fund as well. Some law firms charge more for funds that have less than $100,000,000 in assets, which is something to consider, but it isn’t the biggest factor when dealing with law firms. However, it is common for funds with under $100,000,000 in assets to pay more per hour than funds with over $100,000,000.
You can also look online to see if the lawyers at the firm have written articles and published research. The more research and published works a lawyer has, the better you can see their thought process and intelligence. Many times law firms will have blogs or news letters and this is a good way of seeing what experiences they have had recently.
Finally, getting a few references is always a positive. Asking each firm about their biggest or smallest fund can show their niche as a fund.
Issues Facing Hedge Fund Law Firms
The landscape for hedge fund law firms is growing increasingly complex. Rapid regulatory changes, market volatility, and growing competition within the legal industry itself are all posing significant challenges to hedge fund law firms today.
Regulatory Changes
Following the 2008 financial crisis, the Regulation of the Securities and Exchange Commission over hedge funds continued to increase. The demand for hedge fund attorneys that can navigate the ever-changing regulatory environment is increasing, but many hedge fund law firms are unable to adequately address their clients’ needs, and are consequently losing ground to larger firms with more diverse resources.
Market Volatility
Volatile markets have also reduced hedge funds firms’ incomes. Larger hedge fund companies are vying for the same investors as smaller firms and higher competition means lower incomes overall.
Competition in the Legal Industry
The legal industry is more competitive than ever, and that has taken a toll on hedge fund law firms. Many hedge fund law firms struggle to stand out from the competition and attract new clients.
These challenges present a significant barrier to smaller hedge fund law firms. Smart smaller firms target their resources to address their clients’ needs. By staying on the cutting edge of the industry, smaller hedge fund law firms will stand out from the crowd and deliver the value that their clients have come to expect.
Future of Hedge Fund Law
One of the most prominent trends is the ongoing rise of technology. The industry is expected to continue adopting new tools to help them better manage their portfolios and operations while meeting compliance with increasing regulation. Software suites for portfolio and investment management, compliance, and back- and middle-office functions have all gained in popularity in recent years, making hedge fund and alternative investment lawfirms increasingly likely to invest in tech that supports their institutional clients’ business. There will continue to be a growing trend of different software, tools, and platforms emerging from left field to affect the industry, from trade execution to customer interaction. The full implications remain to be seen, but the trend seems set to disrupt at least some aspects of hedge fund law and the traditional hedge fund lawfirm.
As mentioned above, we’ve already seen an uptick in regulation in hedge funds and private equity funds of all types . Over the next few decades, we expect that trend to continue, with institutions and regulators other than the SEC beginning to take a more active role in oversight. This may force the hedge fund industry to adapt in a variety of ways. One possibility is greater unification globally, as localized laws inevitably create more friction over trade. Another is new investment strategies to optimize tax liabilities around the world. One such approach that has already gained in popularity is profit participation notes, a fixed income security whose yield is usually contingent on the performance of a service, project, or other asset. PPNs allow both issuers and investors to potentially score a lot of upside if they’re not taxed or regulated under the law. We’ve also seen increased interest in the direct lending model for hedge funds, which carries much less regulation as an equity investment.
In the coming years, we expect to see the further growth and adoption of several of these trends. We’ll update this section periodically to reflect future developments.