Regulation challenges

What are the key challenges facing the legal profession working with hedge funds over the next 12 months? What are the likely challenges to impact hedge funds and the legal profession for the short and medium term?

The main challenge, according to Omar Zerafa at Aequitas Legal in Malta, is adapting to new regulation if it is implemented. No matter what happens on the regulatory side, he believes “the task of the legal counsel will be more onerous in ensuring that a fund conforms with all the requirements, especially when compared to the current unregulated situation.”

Brian McDermott and Siobhán Moloney at A&L Goodbody in Dublin say good corporate governance, appropriate risk management and proportionate regulation will all be instrumental in attracting investors and ensuring the growth of the hedge fund industry in the future.

Tania Dons and Richard Finlay in the Cayman Islands office of Conyers Dill & Pearman expect to see a significant amount of distressed fund-related work continuing over the next months.

Legal advisors will need to provide quality advice quickly to help funds deal with issues, they say. Documents will need to be clear and flexible from inception for new launches. Legal advisors and funds have an opportunity to learn from the past and ensure provisions to address potential illiquidity issues in the future are incorporated into the documents from the start, Dons and Finlay note.

Gray Smith at Appleby in Cayman notes that his firm is seeing start-ups again. “Getting the balance right between ensuring the fund has the committed capital it needs to invest and investors being able to get at their cash is causing most headaches right now,” he reveals. “As a firm, it is making sure you are in the right places,” he confides. “We have gone for the approach of being everywhere a fund may want to be and giving the investor the choice.”

“Firms perceived to have been most able to meet the challenges of the last 12 months,” states Nicholas Butcher at Maples and Calder in Cayman, “are likely to be rewarded with new business going forward, as well as to retain the loyalty of existing clients. Characteristics of the law firms best prepared to meet the challenges facing their hedge fund clients include a team -orientated approach, specialisation, flexibility, expertise, experience, responsiveness, ability to generate innovative solutions and understanding of the market,” he concludes.

In London at Brown Rudnick, partner Sonya Van de Graaff agrees with others that helping funds with compliance issues will be a major challenge. She also thinks more legal firms may need to open in new locations in order to be close to clients.

Regulation again tops the list of challenges for Steven Nadel at Seward & Kissel. “All these new proposals will make it more difficult to start a fund and more costly to maintain, plus income earned will be taxed at higher rates,” notes Nadel.

“Because capital has become harder to raise, managers will need to be sure they reach a certain critical mass from an assets under management perspective in order to maintain their needed infrastructure,” he concludes. n