Moving With The Times

Dechert partners look back on ten years of hedge fund practice

Originally published in the June 2007 issue

Ten years ago US law firm Dechert decided it was time to extend its financial services practice to the UK, and last week, at a packed black-tie dinner held at the Banqueting Hall in Whitehall, the firm celebrated the ten year milestone. Ten years ago, while the hedge funds industry was gathering pace, the sector had yet to attain the dizzy heights in terms of assets under management it has achieved today. It was a decision that has proved to be a profitable and far-sighted one for the law firm, and it has capitalised on its position on both sides of the Atlantic, on the increasing level of mutual interest and communication between the alternative investment industries in Europe and America. Dechert has grown with the industry, has increased in sophistication, and has become in turn more global in the way it operates and in the advice it offers. It has been a process of evolution that has gone hand in hand with the client base it serves.

"In 1997 the senior partners felt they had a very good law firm, with good cross-border practices (Dechert already had a close association with the City of London law firm, Titmus Sainer Webb with whom it was to fully merge in 2000), but up to that point no law firm was offering a global one-stop shop to investment managers", says Peter Astleford, one of Dechert's UK-based investment management partners, co-chair of its Financial Services Group and a member of Dechert's global board, who joined the practice a decade ago in its fledgling state.

The decision to make the move into Europe, in conjunction with its merger with a full service City of London law firm – the first true transatlantic law firm merger, has allowed Dechert to offer a one-stop shop in Europe, and its first-mover advantage in this respect has helped it to compete as one of the leading and most respected law firms in the hedge funds space. With 37 fee-earners doing financial services work, including six US lawyers based in London but providing US advice, and 50 lawyers across Europe, it is now widely considered one of the most significant financial services legal practices, alongside the likes of Linklaters and Simmons & Simmons.

However, Simmons & Simmons does not provide the US angle that Dechert offers, and Linklaters has yet to carve itself a significant patch in the hedge fund garden. US specialists Schulte Roth have now arrived in London's Savile Row, and are competing for hedge fund work, but Dechert has been here ten years, is a full service international firm, and now advises the likes of Sloane Robinson, Thames River, Cambridge Place, Cazenove, Cheyne, La Fayette, Boyar Allan, Kairos, AXA Framlington and M&G, all significant alternatives players on the European stage and long-term clients of the firm. With the increased competition in hedge fund legal services, Dechert is not about to rest on its laurels. A decade ago Dechert was already in the position of being able to offer firms commercial and technical advice in relation to their UK products, but also within the same package, access to the knowledge base needed to market into the US. In terms of its American advice, the reverse of this model was also successful, advising US firms interested in the European market.

This international flavour permeated the firm at all levels. When Dechert lawyers were drafting their investment products advice, they were thinking carefully about the fund structures they were offering clients: even if there were no immediate plans to market internationally, the funds were set up so that they could be marketed cross-border far more easily, should the client decide to do so. Ten years ago, Dechert was the only firm that offered such a solution, and it has grown its UK investment management practice successfully using that basic model. If there could be said to be any substantial changes since the practice opened its doors, it has been the rapid growth and sophistication of the alternative investment market. "If anything, the rate of change at which this industry is metamorphosing is increasing", says Stuart Martin, another Dechert partner who enjoys wide recognition within the European hedge fund industry and has been part of the group with Peter Astleford since its inception. "The complexity of the products clients are looking at is increasing, rather than decreasing."

Looking back to his years at Slaughter & May and later at Barings, Martinsaw a clear divide between the authorised funds of the retail market, and the closed and open ended emerging markets and country funds favoured by the institutional market. But with the first glimmerings of interest in alternative assets in the mid-1990s, and the shift from benchmarked performance to an emphasis on absolute returns, there emerged a new breed of manager with a more sophisticated approach to investing, one that was prepared to step outside the comfort zone of the big institutional fund manager to do so. When a senior colleague at Barings left to join a hedge fund, that person being one who Martin expected to assume the CIO role in due course, Martin himself realised the hedge fund concept had real mileage.

A one-stop shop

The growing number of hedge funds and funds of funds with over $1 billion in assets under management, with an expanding institutional client list, and with increasingly sophisticated needs, obviously see the appeal of having a full-service law firm on call which can offer advice on intellectual property, tax planning, labour issues and even corporate finance on top of the usual legal advice fund managers require. "If a hedge fund is threatening litigation, we can do that," says Astleford. CEOs of firms that once functioned along boutique lines now have to cope with a range of legal challenges and issues which comes with the territory of managing a bigger, more globally-oriented business. "Our practice has broadened significantly, but what has changed the most is the very high proportion of repeat work we do for mature, effectively institutional, hedge funds, rather than simply start-up work."

For example, Dechert lawyers now have to stay on top of legal issues arising from the crossover between CDOs and hedge funds, property finance, and M&A issues, and need to deploy a substantial litigation capability. There is also need for more assistance on regulatory issues, as these funds come under an increasing degree of scrutiny. "Hedge funds' needs have changed, along with their level of sophistication and knowledge," says Astleford. "So many other law firms are trying to get into this business, that our added value has to be that much greater."

The proportion of work Dechert dedicates to the alternative investment side of its practice, in terms of dollar value, has mushroomed, and the UK side of the firm now has a strong bias towards this sector. This has included more work with established fund management groups that want to offer their clients a hedge fund capability, a recent example being Cazenove.

It is important here not to ignore the fact that Dechert also maintains a substantial asset management practice outside the hedge fund space, which still accounts for more than 30% of its investment management business in Europe, and provides it with extra depth when advising the hedge fund client. According to Martin: "That's critical, because you've got to be able to look at the client's needs when he comes in. A lot of hedge fund managers, when they start, will have come from a long-only background, and might want to set up a structure which is a bit of a hybrid, or might want to run more than one type of fund using the same investment team. There's no one fund structure that's all things to all men. There might be a client that is obviously suited to a specific structure, but generally speaking it's always going to be an informed compromise. It is always important to work out with a client what is the right solution for them."

More sophisticated demands

Along with the growth in the size of hedge funds has been the trend towards more sophisticated offerings. No longer content to restrict themselves to vanilla structures, hedge funds are now employing listed structures, principal protected notes, fund derivatives, and other means of getting the investment product to the client. "The whole structure has become much more complicated,"says Martin. "As a result of that, our department has really had to move with the times."

The lawyers in the group include three who are UK investment fund experts, two US partners who do fund work and US cross-border securities advice, a debt and securitisation specialist partner, a regulatory expert, a derivatives specialist partner (supported by a team of four derivatives lawyers) and a commercial and M&A specialist partner who is one of the leading deal lawyers in the sector. That means Dechert not only has the capacity to deal with prime broker agreements and general derivatives agreements that its hedge fund clients use, but also has the sophistication within the group to deal with highly structured products which increasingly use derivatives to either mimic hedge fund returns or provide leverage for fund of hedge funds returns, give cross border marketing advice and deal with clients' regulatory and defence needs. Explains Martin: "Putting together a derivatives team, which we've always had, but which we've really expanded over the last four years, is not something that's easy to do, because most of the derivatives lawyers you find in the City tend to operate outside of private practice within in-house departments in banks. What we've been able to do is bring people on within the group to provide those services to our clients, as well as attract some good people too from other firms."

Ten years ago, a good fund lawyer could be defined as someone able to operate across a number of different asset classes, able to tackle both retail funds and hedge funds, as well as having a good tax background. Real skill was being able to access the full menu of fund structures in order to be able to tailor something to meet the specific requirements of a client, rather than levering them into an off-the-shelf solution. Now funds lawyers need a very good grounding in funds, tax, and derivatives. Managers need technical advice, practical advice, and market advice. An increased emphasis on cross-border work on the part of both hedge funds and traditional asset managers, has also led the firm to establish offices in Luxembourg, Paris, and Munich, in addition to its long standing presence in Brussels, and Martin expects to see further expansion in Europe and Asia. The aim is to become a globally-oriented practice "in addition to" a transatlantic one, just as the fund management industry itself becomes far more global in its orientation and strategic thinking.

Changing roles

The above changes in the market continue to throw up challenges for the Dechert business to meet, increased demands for sophisticated services, that have to be delivered in the context of a full-service London firm. A good example of how this works in practice is the advice that Dechert's litigation team has been able to provide to hedge fund managers who are looking at one or more firms embroiled in corporate litigation, and wanting an independent legal view on the likely outcomes as part of their investment decision making process. It represents a whole new area where lawyers can potentially add value for an investment manager, above and beyond their traditional work, and given the increasing volumes of litigation in the corporate world, looks set to be a growth area for big firms like Dechert, especially those with mature litigation teams in the US.

Any examination of how the role of a hedge fund lawyer has changed in the past ten years is incomplete without a mention of the increased levels of red tape and compliance that hedge funds must grapple with, and turn to their lawyers for advice on. "They need to have access to lawyers who are not going to "go off on expensive learning curves", but are going to understand the "key issues" the fund manager should be looking at, and will be able to give the practical commercial advice that will help them to decide what to do," says Martin. "They need that advice on tax, on employment, on enforcement matters. They need access to good, commercial, legal advice. Even on a business start-up, that is advice that needs to be wide-ranging."

As an example, Dechert partner Peter Draper has done more work in financial services M&A deals than any other single corporate lawyer in London. He works on restructuring deals and advises firms on acquisitions and indeed sales. In an industry where hedge funds are starting to list on exchanges, to buy other firms, and to be bought in turn, having such expertise on call is a major boon.

The legal and regulatory challenges are now greater than they were ten years ago, fund managers are increasingly needing to have a CFO/COO function designated at the start. A clear strategy for marketing is also needed, and legal advice on distribution is essential as channels become more diverse – and more heavily regulated – than they were ten years ago. This requires a good understanding of the fund, its strategy, and its likely evolution, something that not all managers necessarily have, but which an experienced lawyer can help them to focus on. As Martin constantly emphasises, fund advice has to take into consideration not just today's requirements, but also tomorrow's


And going forwards? "We have no size aspirations," says Astleford. "However, I expect the practice to be twice the size as an absolute minimum, ten years from now." He points to increasing depth and spread within the industry, and in fact hopes to see Dechert itself becoming more geographically diverse as well, becoming a truly global firm. "We have a good number of clients who have been with us for ten years," says Astleford. "The personal buzz I get out of all this is maintaining and developing the close relationships we have with people in the hedge funds industry. At a time when the industry is becoming less 'clubby', I think personal relationships can still remain a hallmark."

Ultimately, Dechert is working with hedge funds because that is where the sophisticated asset managers want to be. The firm is wedded to the idea of providing its clients with practical commercial advice tailored to the requirements of the individual firms and their ambitions, and drawing on its wide network of lawyers to do that. As hedge funds grow in new and more demanding directions, Dechert is already positioned to be able to advise them on the new territories they are exploring.