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How to start your
hedge fund – The
lawyers‟ perspective
Ho Han Ming
Partner, Clifford Chance Singapore
30 July 2010
CAMRI Inter-Semester Applied Financial Seminar Series 2010
How to start your hedge fund 1
Overview
What are funds?
Fund structures
State of funds industry and outlook
Knowing the rules of your home ground…
…and that of your markets
The hard facts…
…and the softer side of things
How to start your hedge fund 3
Overview
What is a fund?
A collective investment scheme where:
$$$ are pooled together to invest in securities
and/or other asset class with a common goal to
make profit
The participating investors do not have day-to-day
control over the management of the property
How to start your hedge fund 4
Overview - fund types
Types of funds:
Mutual funds (public, open ended, unlisted)
Exchange Traded Funds (public, open ended, listed)
Real Estate Investment Trusts (REITs) (public, open ended,
listed)
Private equity funds (private, closed ended, unlisted)
Hedge funds (private, open ended, unlisted – although “retail
hedge funds” exist)
Most common fund structures:
Companies
Limited partnerships
Unit trusts
How to start your hedge fund 5
Overview - fund types (cont.)
Open-ended funds
Right to redeem units, shares
or interests in the fund at
regular redemption dates
Typically no fixed fund term
Redemptions will reduce the
fund‟s capital
Underlying investments must
be readily realisable to meet
redemption requests
Closed-ended funds
No redemption
Limited fund term
To realise an investment,
the investor has either to
transfer it to a willing
purchaser or wait for the
fund to be wound up
How to start your hedge fund 7
What are mutual funds?
Open-ended: variable “capital” – subscription/ redemption throughout fund term
Authorised to be sold to the retail public
More regulated – types of permissible investment, restrictions on use of derivatives, leverage and short selling, reporting requirements
Pay management fee as fixed % of NAV and need regular dealing/redemption days and NAV calculation (once per month in HK)
How to start your hedge fund 8
Types of mutual funds
Types of mutual funds:
Equity
Bond
Money market
Fund of funds
Balanced/mixed
Others
UCITS
EU framework for authorisation and marketing of
retail funds
How to start your hedge fund 9
Fund landscape: mutual funds
Worldwide: As at 3rd Quarter of 2009, 66,110 mutual funds (68,574 at end of 2008) , AUM of US$22.38 trillion worldwide (+18.3% from end of 2008)
Worldwide Mutual Fund Assets(trillions of U.S. dollars, end of quarter)
How to start your hedge fund 10
Fund landscape: mutual funds (cont.)
Worldwide Mutual Fund
Assets by Region, 2008:Q3
Worldwide Mutual Fund
Assets by Region, 2009:Q3
How to start your hedge fund 11
Real Estate Investment Trusts (REITs)
REITs – a collective investment scheme that
specialises in owning, operating, leasing, or
financing real estate
Provides a similar structure for investment in
real estate as mutual funds provide for
investment in stocks
REITs are generally listed
22 REITs listed on the SGX
7 REITs listed on the HK Stock Exchange
How to start your hedge fund 12
Exchange Traded Funds (ETFs)
ETFs – a fund that typically tracks a
specific market index
Index ETF
– Tracker Fund of Hong Kong (tracks HSI);
– ABF Pan Asia Bond Index Fund (tracks the performance
of the iBoxx ABF Pan-Asia Index)
Commodity ETF
– Gold, oil
Currency ETF
How to start your hedge fund 13
Advantages of ETFs
Lower costs
Buying and selling flexibility through listing
Market exposure and diversification
Transparency
Retail offer of Collective Investment
Schemes (CIS) – authorisation of
Singapore CIS
Singapore CIS must be authorised by MAS - Section
286 of SFA
Criteria for Authorisation Singapore manager
– must hold a capital markets services (CMS) licence for fund management or
applicable exemption (unless managing REIT)
– manager of REIT must have CMS licence for REIT management
Singapore trustee
– must be MAS approved trustee
15How to start your hedge fund
Retail offer of CIS – authorisation of
Singapore CIS (cont.)
Trust deed
– must comply with the trust deed content requirements in the Securities and
Futures (Offers of Investments) (Collective Investment Schemes)
Regulations (SFR-CIS)
Investment guidelines
– must comply with applicable investment guidelines in Code on Collective
Investment Schemes (Code)
– Code has investment guidelines for non-specialised funds, money market
funds, hedge funds, capital guaranteed funds, fund of funds, futures and
options funds and currency funds
If more than 10% sub-managed or fed into a foreign fund
– manager (with related companies) must be managing at least S$500 million
of discretionary funds in Singapore
16How to start your hedge fund
Retail offer of CIS – authorisation of
Singapore CIS (cont.)
Compliance with ongoing requirements under Code Accounts and reports
– annual report and audited accounts to be sent within 3 months of year-end
– semi-annual report and unaudited accounts to be sent within 2 months of
half-year
No transactions with related parties
Prescribed redemption payout period
– T+4 for bond and money market funds, T+7 for feeder funds, T+6 for others
One month's prior notice to investors of significant changes
Soft dollar policy
Valuation rules, investor compensation for 0.5% or more valuation error
17How to start your hedge fund
Retail offer of CIS – recognition of
offshore CIS
Offshore CIS must be recognised by MAS - Section 287
of SFA
Criteria for recognition Offshore manager
– manager must be licensed in home jurisdiction and be fit and proper
Jurisdiction of offshore CIS
– must be jurisdiction with laws and practices providing investor protection
equivalent to that of comparable Singapore authorised CISs – e.g.
Luxembourg, Ireland, France
18How to start your hedge fund
Retail offer of CIS – recognition of
offshore CIS (cont.)
Investment guidelines must be substantially similar to investment guidelines for relevant type of fund set
out in the Code – UCITS III accepted
Singapore representative must appoint Singapore representative to act as liaison between investors and
offshore scheme and to accept service of process
functions include facilitating issue/redemption of units, publishing prices, sending
reports to investors and keeping subsidiary register of Singapore investors
S$500 million AUM Singapore related company(ies) of foreign manager must be managing at least
S$500 million of discretionary funds in Singapore
19How to start your hedge fund
Retail offer of CIS – registration of
prospectus
Prospectus contents must comply with applicable disclosure requirements in Third Schedule of SFR-
CIS
Prospectus to be lodged with and registered by MAS minimum 14-21 day MAS review period
published on MAS OPERA website for public comments
Valid for 12 months
For offshore CIS, Singapore prospectus usually
comprises Singapore wrapper and underlying offshore
prospectus
20How to start your hedge fund
How to start your hedge fund 22
What are private equity funds?
General term for private funds with investment in illiquid investments with a limited fund term
Private closed-ended funds
E.g. private funds which invest in the equity
of a private company
How to start your hedge fund 23
Types of private equity funds
Buyout
Growth/expansion
Venture capital
Real estate/infrastructure
Mezzanine
How to start your hedge fund 24
Typical private equity fund structure
Limited Partnership – Onshore/offshore
Limited Partners General Partner
Investment
Committee
Investment Advisor
Fund
Investment Advisory
Agreement
Offshore Onshore
Manager100%
100%
How to start your hedge fund 25
Fund landscape: private equity funds
Asian private equity aggregate fund pool surged to US$282.9 billion at end-2009 (+8.8% from 2008)
US$23.1 billion of fresh capital inflow in 2009 (-53.9% from 2008)
Funds for growth/expansion dominated, accounting for US$11.4 billion, or nearly 50% of 2009 fresh capital
China-focused funds led all other single market funds accounting for 40.5% or US$9.4 billion of the fresh capital. Yet the amount marked a 45% drop compared to US$17 billion in 2008.
How to start your hedge fund 26
What are hedge funds? Open-ended: variable “capital” – subscription/
redemption throughout fund term
Hedge funds are sold privately – high net worth investors, institutions (but some “retail hedge funds” exist)
Hedge funds are largely unregulated – no restrictions on types of permissible investment, use of derivatives, leverage and short selling, reporting requirements or registration – governed by fund‟s constitutional documents
Pay management fee as fixed % of NAV + performance fees and no specific rules on dealing/redemption days and NAV calculation
How to start your hedge fund 27
What are hedge funds?(cont.)
Originated in 1949
when a leveraged long stock position was combined with a portfolio of short stocks in an investment fund with an incentive fee structure
Not a conventional investment fund
uses a strategy or set of strategies other than investing long in equities, bonds and money market instruments
How to start your hedge fund 28
What are hedge funds?(cont.)
Today alternative strategies include:
selling short
using arbitrage
trading derivatives (options and futures)
trading other financial instruments
using leverage
How to start your hedge fund 29
Types of hedge funds
Long/short equities
Arbitrage/relative value
Distressed debt
Fixed income
Macro
Fund of hedge funds
How to start your hedge fund 30
Typical hedge fund structure
Limited Company - Onshore/offshore
Investors
Fund
Manager
Investment
AdvisorFund Investment
Advisory
Agreement
Offshore Onshore
Parent 100%
100%
Investment
Management
Agreement
How to start your hedge fund 31
Fund landscape: hedge funds
EUREKAHEDGE – worldwide hedge funds AuM of
US$1.48 trillion as at end-2009
Managers posted best annual performance in 6 years,
returning an average 19% in 2009
Estimated AuM to reach $1.68 trillion by end-2010
(+14%)
How to start your hedge fund 32
Asia ex-Japan hedge funds AuM accounted for US$106 billion as at Jan 2009 (approx. 7.58% of worldwide AuM)
Asia ex-Japan with US$5.2 billion (4.66% of AuM) redemptions in Jan 2009 while North America recorded US$51.8 redemptions (5.3% of AuM)
Asia ex-Japan hedge funds recorded positive performance in Dec 2008
Fund landscape: hedge funds(cont.)
How to start your hedge fund 33
Other fund types - SWF
Sovereign wealth funds: government-sponsored entities that invest public money
Santiago Principles – October 2008
“special purpose investment funds or arrangements, owned by the general government. Created by the general government for macroeconomic purposes, SWFs hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies which include investing in foreign financial assets. The SWFs are commonly established out of balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, fiscal surpluses, and/or receipts resulting from commodity exports.”
Assets under management of sovereign wealth funds decreased by 3% in 2009 to US$3.8 trillion
How to start your hedge fund 34
Who are they?
Commonly quoted
But are they “funds”?
SWF Estimated Assets under
Management (US$bn)
1. Abu Dhabi Investment Authority 627
2. Govt Pension Fund of Norway 445
3. Saudi Arabia Monetary Agency 431
4. SAFE Investment Company 347
5. China Investment Corporation 289
6. Govt of Singapore Investment Corp 248
7. Kuwait Investment Authority 203
8. (National Welfare Fund) (Russia) 168
9. National Social Security Fund (China) 147
10. Hong Kong Monetary Authority Investment Portfolio 140
Source: FT/IFSL as at end of 2009
How to start your hedge fund 36
Hedge fund collapses – why?
Investor redemptions - forced liquidation or
portfolio sale
Forced de-leveraging
Short selling bans
Insufficient risk management
Ponzi schemes
How to start your hedge fund 37
What is the outlook for the fund industry?
Return of investors to safer investments – e.g. ETFs,
UCITS (more transparency and focus on risk
management)
Return of funds into areas from which traditional
financial institutions will retreat (e.g.
lending/securitisation)
However, increase of regulation of “unregulated”
funds:
Alternative Investment Fund Managers Directive will make
marketing into Europe difficult
Additional registration requirements in the US
Knowing the rules
of your home
ground
Singapore licensing of
hedge fund managers
38How to start your hedge fund
Current regulatory regime and the
proposed way forward
Under the current regulatory regime managers are either
o An exempt fund manager (EFM) for not more than 30 qualified investors; or
o A holder of a capital markets services (CMS) licence
MAS Consultation Paper proposes three categories of managers under the new regulatory regime
o Notified Managers
managers whose AUM are not more than S$250m and having not more than 30 qualified investor clients (with not more than 15 funds)
o Licensed A/I Managers
managers of only accredited and/or institutional investors
o Licensed Retail Managers
managers of retail (non-accredited and non-institutional) investors
How to start your hedge fund 39
Process going forward
Public Consultation closed 31 May 2010
New “Investment Intermediaries Department”
Approximately 12 months from MAS consultation to effecting of new
legislation
Existing EFMs will have a transitional period of 6 months from effective
legislative date to comply with and apply for appropriate status (i.e.
Notified Manager or Licensed A/I Manager)
18 months in total for existing EFMs to comply with revised admission
criteria
40How to start your hedge fund
Admission criteria:
Number of directors
41
Notified Manager Licensed A/l Manager
Minimum 2 directors, one of whom must be a Singapore resident executive
director
How to start your hedge fund
Admission criteria:Number of representatives and individual track record
Notified Manager Licensed A/l Manager
Minimum 2 full-time Singapore resident representatives (can be directors as
well)
Minimum 2 full-time Singapore resident individuals, each with minimum 5
years of relevant experience (can be directors and/or representatives)
No exams required
42How to start your hedge fund
Admission criteria:
Corporate track record
43
Notified Manager Licensed A/l Manager
No minimum corporate track record required
How to start your hedge fund
Admission criteria:
Demonstration of commitment
Notified Manager Licensed A/l Manager
Can be demonstrated in various ways such as:
• Directors having majority shareholding of Singapore Manager
• Individual Managers placing seed money in own managed fund
• Alternative ways subject to consultation with MAS
44How to start your hedge fund
Admission criteria:
Professional indemnity insurance (PII)
Notified Manager Licensed A/l Manager
Strongly encouraged but not mandatory
45How to start your hedge fund
Ongoing requirements: Capital
Notified Manager Licensed A/l Manager
Base capital S$250,0001 Base capital S$250,000
No risk-based capital requirements Subject to risk-based capital
requirements
Operational risk requirement2
computed as 10% of 3-year
average of gross income and
subject to minimum of
S$100,0003
46
1 Paid-up ordinary share capital, irredeemable and non-cumulative preference share capital and retained earnings, less any
unaudited interim losses during the year, may be used to meet base capital requirements.
2 Currently, operational risk requirement for CMS licence holders for fund management computed as 10% of annual
revenue of most recent financial year.
3 A holder of a CMS licence conducting fund management activity may use base capital, irredeemable and cumulative
preference share capital, less any intangible assets, as financial resources to meet the operational risk requirement.
How to start your hedge fund
Ongoing requirements: Compliance
Notified Manager Licensed A/l Manager
CEO or designated senior staff to
be responsible for compliance
No requirement for compliance to
be “independent”4 or “dedicated”5
Compliance function must be
independent from front office
Managers with S$1 billion AUM
must have independent and
dedicated compliance function
47
4 “Independent” means that the compliance function is distinct from front office.
5 “Dedicated” means that the compliance function is performed on a full-time basis by individuals who are not involved
in any other front, middle and back office functions, excluding control functions such as internal audit.
How to start your hedge fund
Ongoing Requirements:Custodial arrangements and fund administration
Notified Manager Licensed A/l Manager
Customers' monies and assets to be placed with a licensed custodian in
jurisdiction where the monies or assets are held
Ensure independence/segregation between fund management and fund
administration functions
48How to start your hedge fund
Ongoing requirements: Client disclosure
Notified Manager Licensed A/l Manager
• Provide adequate disclosure to investors on issues such as:
• custodial and fund administration arrangements
• compliance arrangements
• conflicts of interest (including potential) and
• PII arrangements
49How to start your hedge fund
EFM vs Notified Manager
50
Criteria EFM Notified Manager
Clientele Max 30 qualified investors (may
manage 30 funds)
Max 30 qualified investors (but
not more than 15 funds)
Number of Directors Minimum 1 Singapore resident
CEO or executive director
Minimum two directors, one of
whom must be a Singapore
resident executive director
Number of
Representatives and
Individual Track
Record
Minimum 2 Singapore resident
professionals, each with
minimum 5 years of relevant
experience
No exams required
Minimum 2 full-time Singapore
resident representatives (can be
directors as well)
Minimum 2 full-time Singapore
resident individuals, each with
minimum 5 years of relevant
experience (can be directors
and/or representatives)
No exams required
How to start your hedge fund
EFM vs Notified Manager (cont.)
51
Criteria EFM Notified Manager
Corporate Track
Record
N/A No minimum corporate track
record required
Demonstration of
Commitment
N/A E.g. directors having majority
shareholding, managers
placing seed money in
managed fund, alternative
ways subject to consultation
with MAS
Professional Indemnity
Insurance (PII)
N/A Strongly encouraged but not
mandatory
Base capital Paid-up capital must be
sufficient to cover set-up cost
and at least 6 months of
operational costs
To maintain positive
shareholders' equity at all times
Base capital S$250,000
Risk-based capital N/A N/A
How to start your hedge fund
EFM vs Notified Manager (cont.)
52
Criteria EFM Notified Manager
Compliance N/A CEO or designated senior staff to be
responsible for compliance
No requirement for compliance to be
independent or dedicated
Custodial
Arrangements for
Customers' Monies
and Assets
N/A Customers' monies and assets to be placed
with a licensed custodian in jurisdiction
where the monies or assets are held
Fund Administration N/A Ensure independence/ segregation between
fund management and fund administration
functions
Client Disclosure N/A Provide adequate disclosure to investors on
issues such as custodial and fund
administration arrangements, compliance
arrangements, conflicts of interest and PII
arrangements
How to start your hedge fund
EFM vs Licensed A/I Manager vs Start
Up Boutique Fund Manager
53
Criteria EFM Licensed A/I Manager Start-Up BFM
Clientele Max 30 qualified
investors
No numerical limit
on accredited
investors or
institutional
investors
Max 100 qualified
investors for first
3 years
Thereafter only
accredited
investors
Number of
Directors
Minimum 1 Singapore
resident CEO or
executive director
Minimum 2
directors, one of
whom must be a
Singapore resident
executive director
Minimum 2
directors, one of
whom must be a
Singapore
resident
executive director
How to start your hedge fund
EFM vs Licensed A/I Manager vs Start
Up Boutique Fund Manager (cont.)
54
Criteria EFM Licensed A/I Manager Start-Up BFM
Number of
Reps and
Individual
Track Record
Minimum 2
Singapore
resident
professionals,
each with
minimum 5
years of
relevant
experience
No exams
required
Minimum 2 full-time
Singapore resident
representatives (can
be directors as well)
Minimum 2 full-time
Singapore resident
individuals, each
with minimum 5
years of relevant
experience (can be
directors and/or
representatives)
No exams required
Minimum 2 full-time Singapore
resident representatives (can be
directors as well)
At least 1 fund manager
representative must be a
substantial shareholder with
minimum 10-year track record in
fund management or in a closely
related area, with at least 3 years of
experience in fund management
At least one other fund manager
representative must have at least 5
years of experience in fund
management or related areas
Required to pass CMFAS exams
How to start your hedge fund
EFM vs Licensed A/I Manager vs Start
Up Boutique Fund Manager (cont.)
55
Criteria EFM Licensed A/I Manager Start-Up BFM
Corporate Track
Record
N/A No minimum corporate
track record required
No minimum corporate
track record required
Demonstration of
Commitment
N/A Eg directors having
majority shareholding,
managers placing seed
money in managed
fund, alternative ways
subject to consultation
with MAS
Must be ultimately
majority-owned by
either Singapore citizens
or Singapore PRs,
foreign ownership
considered on a case-by-
case basis
Letter of responsibility
from parent company
Professional
Indemnity
Insurance (PII)
N/A Strongly encouraged
but not mandatory
Mandatory PII
How to start your hedge fund
EFM vs Licensed A/I Manager vs Start
Up Boutique Fund Manager (cont.)
56
Criteria EFM Licensed A/I Manager Start-Up BFM
Base capital Paid-up capital
must be sufficient
to cover set-up
cost and at least 6
months of
operational costs
To maintain
positive
shareholders'
equity at all times
Base capital
S$250,000
Base capital
S$250,000
How to start your hedge fund
EFM vs Licensed A/I Manager vs Start
Up Boutique Fund Manager (cont.)
57
Criteria EFM Licensed A/I Manager Start-Up BFM
Risk-based
capital
N/A Subject to risk-based capital
requirements
Operational risk requirement
computed as 10% of 3-year
average of gross income and
subject to minimum of
S$100,000
Subject to risk-based capital
requirements
Currently operational risk
requirement computed as 10% of
annual revenue of most recent
financial year (will be changed to be
in line with Licensed A/I Manager
operational risk requirement)
Compliance N/A Compliance function must be
independent from front office
Managers with S$1 billion
AUM must have independent
and dedicated compliance
function
Expected to have independent
and dedicated compliance
function based in Singapore
How to start your hedge fund
EFM vs Licensed A/I Manager vs Start
Up Boutique Fund Manager (cont.)
58
Criteria EFM Licensed A/I Manager Start-Up BFM
Custodial
Arrangements for
Customers'
Monies and
Assets
N/A Customers' monies and assets to
be placed with a licensed
custodian in jurisdiction where the
monies or assets are held
Subject to regulatory custody
requirements which will be
changed to be in line with the
Licensed AI Manager
requirement for custodial
arrangements
Fund
Administration
N/A Ensure independence/
segregation between fund
management and fund
administration functions
Will be changed to be in line
with Licensed AI Manager
requirement for fund
administration
Client Disclosure N/A Provide adequate disclosure to
investors on issues such as
custodial and fund administration
arrangements, compliance
arrangements, conflicts of interest
and PII arrangements
Subject to applicable
regulatory prospectus
disclosure requirements for
fund offers
How to start your hedge fund
What does it mean for new managers…
Existing EFM (Form 22) notification
remains in effect
To consider appropriate category and to
comply with relevant criteria when
regulations come into effect
EFM applicants will have to demonstrate
ability to meet revised admission criteria
and fulfil the baseline requirements set out
in MAS‟ FAQs on Exempt Persons
59How to start your hedge fund
. . . and existing managers?
There will be no grandfathering for incumbent
managers
Existing EFMs with AUM more than S$250m or who
manage more than 15 funds must submit application
to be licensed as a Licensed A/I Manager
Existing EFMs with AUM less than S$250m and
managing not more than 15 funds may choose to
either submit notification to be a Notified Manager or
submit application to be licensed as a Licensed A/I
Manager
60How to start your hedge fund
Knowing the rules
of your markets
European directive
and US regulatory
changes
61How to start your hedge fund
The Draft Alternative Investment Fund
Manager Directive
Original proposal issued by EU Commission
on 30 April 2009
Designed to require registration and regulation
of Alternative Investment Fund Managers
(other than UCITs managers) established in
EU and
Regulate marketing in EU of AIF managed by
managers outside EU, regardless of AIF
location
62How to start your hedge fund
In early March – The Geithner letter: a
tipping point?
63
… we are concerned
with various proposals
that would discriminate
against US firms and
deny them the access to
the US market that they
currently have . . .
. . . our approach in the
US maintains full access
for EU managers and
custodians to our
market
How to start your hedge fund
Likelihood of hedge funds in Asia to be
set up as UCITS III funds
64
Source: Ipsos Hong Kong – April 2010
Q16: Are hedge funds in Asia likely to be set up as UCITS III funds and/or re-
domiciled/restructured from Cayman’s funds to UCITS vehicles in future?
Base: 249 respondent managersMajority Asian based
How to start your hedge fund
Business impact if EU adopts the AIFM
Directive in proposed current form
65
Base: 249 respondent managersMajority Asian based
Source: Ipsos Hong Kong April 2010
Q9: How significant will be the impact on your business if the European Commission adopt the AIFM Directive in its proposed current form (such as it is)?
How to start your hedge fund
US Regulatory Proposals – Introduction
G-20 London Summit April 2009 – ensure all
systemically important hedge funds are
subject to regulation
US takes a much lighter approach than the
EU
Adviser registration for access to information
Net effect - many advisers will now have to
register with the SEC
6666How to start your hedge fund
Earlier US Legislative Proposals (now
superseded)
Draft BillsDate of
IntroductionStatus
Hedge Fund Adviser Registration
Act27 January 2009 Referred to Committee
Hedge Fund Transparency Act 29 January 2009 Referred to Committee
Private Fund Transparency Act 16 June 2009 Referred to Committee
Private Fund Investment Advisers
Registration Act of 200927 October 2009 Passed by Committee
The Dodd Bill (initial) 10 November 2009 Referred to Committee
6767How to start your hedge fund
Current US Legislative Proposals
Draft BillsDate of
IntroductionStatus
Wall Street Reform &
Consumer Protection Act
(the “House Proposal”)
2 December
2009
Passed by the House
of Representatives
Restoring American
Financial Stability Act (the
“Senate Proposal”) – a
revised Dodd Bill
15 March 2010 Passed by Committee
6868How to start your hedge fund
Current US Legislative Proposals
Both the House Proposal and the Senate
Proposal cover broad financial sector regulatory
reform:
Regulation of Private Investment Funds and Advisers
Establishment of Financial Services Oversight Council
Derivatives Regulation
Establishment of New Consumer Protection Agency
Senate Proposal also introduced the Volcker
Rule
6969How to start your hedge fund
US Proposals – Implications for offshore managers
Whether exemption to small private fund with AUM < US$150m or US$100m in US
No registration or records/reporting requirements under foreign private adviser exemption
Private foreign adviser exemption not applicable if there is place of business in US
Consider impact on business if registration with SEC required
70How to start your hedge fund
US Proposals – Timetable
Could be accelerated
Senators from both parties willing to compromise
on differences
Obama actively engaging the Senate and the
House to move quickly on a financial regulatory
reform package
Other „difficult issues to be resolved‟ – bail-outs/
derivatives regulations
71How to start your hedge fund
Going forward?
US Treasury Secretary Tim Geithner:
“The Senate bill is strong. It would create an
independent agency to better protect American
families across the financial marketplace. It
would protect against "too big to fail." And it
would bring the derivatives market out of the
dark. As the bill moves to the floor, we will fight
any attempt to weaken it. The American people
have suffered through too much to enact reform
that does too little.”
72How to start your hedge fund
Seek to register with the SEC if the US Proposals
to remove the 15 persons exemption
Source: Ipsos Hong Kong – April 2010
Q10: Will you (if not already registered), or will you be required to seek
to register with the SEC if the US Administration proposals are
enacted to remove the 15 persons exemption for fund advisers?
Base: 249 respondent managersMajority Asian based
73How to start your hedge fund
Enforcement issues for fund managersCommon counterparty issues and how to address them
Nature of the counterparty
Nature of the trade/position
75How to start your hedge fund
Nature of the counterparty
Types of transactions: eg listed
securities/swaps or other derivative
transactions
Blue chip counterparties (eg prime
brokers/financial institutions)
Low risk
76How to start your hedge fund
Nature of the counterparty
Re-considering the assumptions post
Lehmans
77How to start your hedge fund
Nature of the trade/position
(secured/unsecured)
Important to know exactly what the nature
of the contractual arrangement between the
fund and the counterparty is:
Eg What are the implications of re-hypothecation/
power to use?
78How to start your hedge fund
Nature of the trade/position
(secured/unsecured)
Rehypothecation:
“Rehypothecation is the ability of a prime broker
to use client assets posted as collateral to that
prime broker for the prime broker's own
purposes”
79How to start your hedge fund
Nature of the trade/position
(secured/unsecured)
In an insolvency of the prime broker, what
are your rights?
Do you rank as a secured creditor or an
unsecured creditor?
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A new problem
"The exclusive announcement in Sunday's TIMES that the banking and brokerage firm of Greenleaf, Norris Co. had been placed in the hands of Seiah Chamberlain, as Receiver, on the latter's affidavit that the firm had rehypothecated large amounts of securities deposited with them by other persons, as security for the repayment of loans obtained by them in their own name, and, that in this rehypothecation the securities had been mingled together, thus rendering it a very difficult task for the owners of the pledged securities to obtain their own property, created a sensation on the street yesterday."
The New York Times, March 5, 1878
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Nature of the trade/position
(secured/unsecured)
Similar issues for swaps:
Financial institutions seeking “independent
amounts” irrespective of actual exposure
What is the nature of the repayment obligation in
relation to such amounts? Secured/unsecured?
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Solutions
Look closely at the prime brokerage
agreements to see if there are ways to
ensure that the security is preserved
(eg allow only limited rehypothecation based on a
percentage of exposure)
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Putting talent attraction back on centre stage
Talent attraction and talent retention are
key
“It’s not going to be just about the cash and
the pay; it’s ultimately about how you’re
going to engage your people”
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Traits of the stronger funds
Transparency
Clear strategy
Clear structure
Clear communication
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Turning the quest for talent inward -Asia
Where is the talent pool?
Is 2010 a hirer‟s market?
The poster child for HFs in Asia
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Compensation with flexibility
Level of compensation
Guarantee bonus
Discretionary bonus
Deferrals and clawbacks
Equity interest
Tax
Brand
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Greater supply of the right information – both ways
Cultural fit between employer and
employee
More due diligence on both sides
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Fitting in with the regulatory landscape
Flexibility vs structured approach
Investor relationship
Risk and compliance
Accounting and tax
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Elasticity rules
“After 2009, hedge funds have become
keen on having elastic strategies that help
them undergo any future economic ups and
downs – hedge funds are more mindful
about how employment contracts are
worded and the way benefits are
structured.”
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Greater competition for talent in 2011 and beyond
More new fund formation in Asia
Competition from investment bank, asset
managers, pension funds and regulators
The 2010 Hedge Fund Compensation Report
(Reuters)
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