Fundamentals series predicts future hedge funds growth

A hedge fund seminar hosted by offshore law firm Walkers in New York in November brought together industry leaders to discuss key issues for investment funds in 2012. 

Most funds incorporated by Walkers in the past 12 months chose a company vehicle over partnerships and unit trust and a clear preference for quarterly liquidity according to a survey by Walkers’ Global Investment Funds Group. Walkers partners Ingrid Pierce and Neil Lupton, who presented the latest trends in fund terms and corporate governance at the event, said the survey demonstrated that the vast majority of funds (86 per cent) were formed with a company vehicle, with 7 per cent structured as limited partnerships and 7 per cent as unit trusts. A preference towards quarterly liquidity was clear with 55 per cent of funds established in that manner, while 35 per cent of funds had monthly liquidity, 4 per cent annually and 3 per cent weekly. In terms of lock ups, the overwhelming choice was for a 12-month period, with 10 per cent going for two years and 10 per cent opting for six months. Further evidence, meanwhile, of the strong desire for the presence of independent directors was clear with 64 per cent of funds appointing independent directors, of which 83 per cent had a majority of independent directors on their board. 



Industry trends 


A new element to the ‘Fundamentals’ seminars saw a panel of hedge fund experts outline the state of the industry, offer tips and best practice guidance on compliance and governance issues and let delegates in on what is keeping them awake at night in the current market conditions.  

Giving his outlook, Eric Vincent, who most recently served as president of Ospraie Management LLC, said he expects alternatives to continue to pick up share with the industry continuing to mature and institutionalise, although he added that there will always be an entrepreneurial element and there will always be new managers. “Increasingly the alternative industry will manage more assets in real and nominal terms,” Vincent said. 

Joel Press, managing member of Press Management LLC and formerly managing director of Prime Brokerage for Morgan Stanley, also made the point that entrepreneurs will always find a way, before predicting that in five years’ time the industry will be managing over $4 trillion of assets. “In the next two years we will figure out a way to show investors how well this industry has done over the last six years looking at volatility, performance and results, with very little leverage in the past three years,” he added. “That’s why I think this industry has tremendous depth going forward.” 

Marathon Asset Management’s Jim Leahy said he expects to see further enhancement and development of infrastructure as a part of the organisation. “That means having a fully developed internal legal and compliance department, accounting tax, operations, risk, human resources and information technology, just to name a few,” he said. “The costs to operate will go up dramatically.” 

Creating some concern among the managers on the panel was the new ‘Form PF’ that must be filed by all investment advisers registered with the Securities and Exchange Commission or the Commodity Futures Trading Commission, which is due on 15 January 2012 for advisors with assets over US$1 billion. 

“If you are not familiar with form PF then you had better be, because you will be criminally liable on signing form PF,” said Joel Press. “This is the first time the hedge fund industry has been exposed to what the broker dealer community signs in a focus report.” 

“I’m not quite as troubled by Form PF,” commented Eric Vincent. “I see it as part of the natural evolution of the industry and an expectation of greater oversight of the industry which is not surprising given what we have gone through over the last several years.” 

Offshore update 

In the ‘Offshore Update – What’s coming in 2012’ session, moderated by Rod Palmer, partner and global head of Investment Funds with Walkers, presentations were made from three of Walkers’ partners in three of the firm’s key funds jurisdictions, with Jennifer Thomson covering Cayman, Tim Clipstone looking at the BVI and Paul Farrell running through the Irish experience. The Cayman update included data from the Cayman Islands Monetary Authority which showed that an inconsequential number of funds have redomiciled away from the Cayman Islands so far this year, with just one fund moving to Ireland and one transferring to Delaware. Also under discussion was the potential regulation of Cayman Islands Master Funds, which had been floated by the Cayman government earlier in the year.  

Although the Irish funds sector has not benefited from any mass exodus of funds leaving Cayman, as some had anticipated would happen in the wake of the Alternative Investment Fund Managers Directive, Paul Farrell from Walkers’ Dublin office, noted the strength of the Irish investment funds industry with $52.2 billion of inflows during the first half of 2011, which was $9.6 billion ahead of the nearest EU jurisdiction.  

Tim Clipstone, meanwhile, told delegates that BVI fund numbers have been steady at around 2,700 funds, with approximately 20 new funds being formed each month. “We are not seeing a great deal of redomiciliations but where we are seeing it, they are going to Cayman,” he said. 


World economy shifting 

The headline presentation at the event came from economic analyst, political historian and award winning author Zachary Karabell, president of River Twice Research, who analysed how the fear of negative future outcomes had gripped the global economy this year. Karabell said we are living in the period of the greatest wealth creation the world has ever known, with hundreds of millions of people moving out of poverty, capital being unlocked and potential being created, but you wouldn’t know it if you were in Rome, Athens or New York or Tokyo this year. “You wouldn’t know it because the balance is shifting from the world that drove the world economy in the 20th century to the worlds that are driving it in the 21st century,” he said. 

Karabell said the notion that we live in one economy is a myth and that we pay an inordinate amount of attention to the monthly US jobs report, when perhaps we should instead be looking more at the ‘Steve Jobs Report’ and asking how Apple has managed to sell hundreds of billions of dollars, of not necessarily essential devices, during a period of such intense economic strain. 

“The reality is that both reports are reflective of the economy in which we live but culturally we pay far more attention to one than we do to the other, discounting the complexity of our own system,” Karabell said. “For the investing community there is a world of growth and expansion which is being underestimated and underpriced. If there is one mispriced asset it is global growth and the ability of companies to access it. As for the fears we have about longer term outcomes I would say that we live in a more stable global economy than at any measurable point in human history and while there is the risk of systemic collapse, until something systemically collapses, it hasn’t.” 

Held on 8 November at the Harvard Club in midtown Manhattan, 2011 was the fourth year that Walkers has hosted its seminar, attracting over 300 professionals from the New York investment funds sector. Entitled ‘Fundamental Change – Hot Topics in Hedge Funds’, points for discussion included regulatory developments, corporate governance, trends, risks and opportunities present in the market, as well as in-depth views on the current climate from some of the industry’s thought leaders. 

L-R Jim Leahy, Joel Press and Eric Vincent

From left Jim Leahy, Joel Press and Eric Vincent. Photo: Submitted