The increased pressure hedge fund managers are under today in terms of investor due diligence and regulatory compliance means that partnering with the right service providers is a key consideration.
Sidley Austin is one of the leading law firms in the alternative investment space. As such, this necessity for alternative fund managers to mitigate operational risk has placed Sidley Austin firmly in their minds to help them stay current with the fast-changing regulatory and compliance landscape.
This is especially true for start-up managers. As Michael Schmidtberger, Co-head of Sidley’s Investment Funds, Advisers and Derivatives Group observes, 2013 has been a strong year for Sidley Austin, and whereas pre-2008 managers were launching funds with little experience of market stress, today’s start-up manager is a different breed of animal; one that has already worked at an established hedge fund or financial institution and built up a track record over the last few years.
“In terms of profile and pedigree they are more seasoned. They have accomplished more before looking to spin out on their own. They understand what institutional investors require in terms of infrastructure, professional support, human capital. They are more sophisticated because they’ve effectively grown up in a period when a great deal was demanded of their prior employer,” says Schmidtberger, who adds:
“There has never been a better time for elite service providers to demonstrate their value-add to their hedge fund clients. It doesn’t just pertain to law firms but all service providers. Firms understand that the biggest risk they face is not performance; it’s regulatory and operational compliance. If your systems go down, or you have an SEC inspection that goes poorly, the knock-on effect to your business may be devastating.”
Whereas managers are in full control of their funds, regulation and investor due diligence are external influences that they cannot control. Having strong partnerships with service providers can overcome this.
“What we’re dealing with in the investment management business is a paradigm shift. The expectations are much more absolute. If an enforcement action is brought against you, or an investor makes a serious allegation, it can have a broad, negative impact on the business.”
Sidley Austin has been building its regulatory expertise for multiple generations. Sidley’s lawyers serve virtually every type of investment fund and investment manager and have substantial capability across the entire spectrum of asset classes. In total, the firm has more than 120 corporate, securities and derivatives lawyers worldwide focused on various aspects of fund formation, operation and regulation.
“We tend to gravitate towards more substantial launches and platforms because we have the expertise and global reach to be able to be effective.
“And we continue to grow our enforcement and regulatory capabilities. We did probably the largest lateral acquisition this year with 10 partners joining us from another firm that specialise in securities and derivatives regulation and enforcement. All told, the acquisition doubled the size of our New York team,” confirms Schmidtberger.
The fact that a better pedigree of hedge fund manager is launching today, with a greater appreciation and understanding of how to run a hedge fund in the new regulatory environment, shows that the industry is maturing.
“Most hedge fund managers are well aware of what they need to be doing, they are conscientiously trying to improve and anticipate future needs.”