Challenging environment encourages greater creativity
Eversheds Sutherland: Best Law Firm – The persistent low rate environment has been pushing hedge fund managers to explore more creative options when looking to launch new funds. Increasing regulatory scrutiny is prompting greater urgency on the ESG front, while cyber-security threats, Brexit and other global events continue to influence the hedge fund industry.
Law firm Eversheds Sutherland expects continued low interest rates to be a key driver of future market development. “In the hedge space, this might increase the pool of potential investors, as more investors look to achieve higher returns by taking on more risk,” Ben Watford (pictured), Partner, Financial Institutions, Eversheds Sutherland notes.
There has also been an increase in the number of managers exploring new legal options and strategies. This trend is also likely to increase as managers look for fresh approaches to achieve favourable returns. So, despite the challenges, the hedge fund world remains buoyant.
Watford says: “Currently we are advising on wide a number of new launches across the launch AUM spectrum from USD50 million into the billions. We are still seeing plenty of interest in the traditional strategies, but we are also working with some interesting new asset classes, most notably in the digital currency and cannabis space. We look forward to developing these relationships over the coming months.”
January 2020 saw the UK officially leave the Europe Union, which had and is still having, a profound impact on the financial services industry. As the process remains in a state of flux, law firms supporting the industry highlight the importance of having up to date information on how Brexit is evolving in the funds space.
“Many of our clients’ and their wider teams are rightly focusing on the UK’s departure from the European Union and the impact it may have on their businesses, supply chains, employees and other stakeholders… Our continuously updated Financial Services European Brexit tracker enables clients to obtain a quick overview of the current position in relation to UK funds and UK fund managers seeking to sell services into EU27 countries after Brexit, including what steps may be necessary to relocate to those countries and whether delegation of functions from those countries to the UK after Brexit may be possible,” explains Watford.
The firm anticipates the UK fund industry pivoting towards the US as North American investors become more attractive following the UK’s departure from the trading bloc. Watford says he saw a spike in new manager launches following the UK election, suggesting there is light at the end of the Brexit tunnel.
Looking to the future, Watford is keen to highlight increasing importance of ESG, both as an investment strategy and a due diligence requirement: “It seems likely that a heady combination of changing investor demand and top down regulatory pressure will continue to effect change in the industry.”
Cyber-security and the fast pace of technological change is another cog in the hedge fund machine which needs to be kept well-oiled. Cyber-security continues to be one of the major external threats and breaches in this area could act as a catalyst for broader market changes in the coming decade.
“Cyber security is not something that can be fixed once; continual improvement has evolved from best practice, to minimum requirement. We will have to work hard if we want to pull ahead, rather than merely keep up, in the technological arms race to come,” Watford concludes.
Partner, Head of Hedge Funds, Eversheds Sutherland
Ben Watford is a Partner in the London office of Eversheds Sutherland and leads the Hedge Fund practice, advising tier one funds to start-ups, and everything in between. He has worked on a wide range of alternative investment funds for fund managers, family offices, sovereign investors and entrepreneurs, domiciled in various jurisdictions including the Cayman Islands, Ireland, Luxembourg, Channel Islands, BVI, Malta, UK, and the US.