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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 The - National University of Singapore

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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

Overview

2How to start your hedge fund

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

Retail funds

6How to start your hedge fund

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 funds in

Singapore

14How to start your hedge fund

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

Private funds

21How 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

State of funds

industry and outlook

35How to start your hedge fund

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

74How 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”

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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

81How to start your hedge fund

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)

83How to start your hedge fund

The business of

people

84How to start your hedge fund

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”

85How to start your hedge fund

Traits of the stronger funds

Transparency

Clear strategy

Clear structure

Clear communication

86How to start your hedge fund

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

88How to start your hedge fund

Greater supply of the right information – both ways

Cultural fit between employer and

employee

More due diligence on both sides

89How to start your hedge fund

Fitting in with the regulatory landscape

Flexibility vs structured approach

Investor relationship

Risk and compliance

Accounting and tax

90How to start your hedge fund

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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Questions?

and

thank you!

93How to start your hedge fund

Clifford Chance Pte Ltd, One George Street, 19th Floor, Singapore 049145

© Clifford Chance Pte Ltd 2010

Clifford Chance Pte Ltd

SINGAP-1-124775-v3

www.cliffordchance.com

How to start your

hedge fund – The

lawyers‟ perspective