While the concept of in-house lawyers, either operating alone or in formal departments has been widely accepted in commerce, industry and the wider financial services arena for well over a decade, it is still relatively novel within the hedge funds community. However, as the regulatory environment tightens and formal infrastructures become more common, the arguments in favour of in-house legal specialists, such as savings on professional fees, a focus on the individual business and 'on-tap' guidance and support on a continuous basis have convinced many fund managers that recruiting and retaining their own lawyer could be a wise investment. As Giath Al-Mousawi, a lawyer working for Sigma Asset Management in Guernsey sums it up, "It's better to have people actually on board so that they can foresee problems before they happen and can manage the use of external counsel to cut overall costs."
Across the Atlantic in New York, the shift to a reliance on in-house personnel has led to a scramble for individuals with directly relevant experience and a bidding war for the very best. Even small funds are reported as making offers in the region of $300,000, while earnings at the very largest players can exceed the $1 million mark. As a result some of the major legal firms operating in the sector in the US have found themselves haemorrhaging talent and have consequently gone as far as asking clients to sign formal undertakings not to poach their people in order to staunch the flow.
Here in the UK, the situation remains a little more civilised. "My people are constantly being approached, but our attrition rate is still very low," says Tim Shipton, the partner heading up the investment management group at Linklaters. "We find that, despite the immediate financial attractions on offer, the juniors stay put because they are still learning and developing and more senior people think twice because of the prospect of partnership within the firm. However that doesn't mean that we are complacent. Where the US leads, Europe often seems to follow before too long."
For the moment there is certainly a slow but steady flow of lawyers at all levels from private practice and from other sections of the financial services industry such as investment banks or more traditional asset managers, but, as yet, there is no sign of the feeding frenzy seen in Manhattan. However unless you are confident of attracting your current lawyer out of their firm and into your organisation, tapping into this flow will most likely mean moving outside of your usual network of contacts and potential employees. The main challenge that hedge funds consequently face in sourcing the right in-house lawyer in this environment is to understand the motivations of individuals who often have a fundamentally different world view to the average hedge fund hire. So how do you go about successfully recruiting and retaining a legal professional?
Lawyers considering a move into the hedge fund sector often tend to be motivated by financial incentives, by a perception that they can earn substantially more than in practice or elsewhere in financial services. However, on examining the sector in detail they are often disappointed by the level of basic salaries on offer at practically every level. Despite their keenness to recruit in-houselawyers, most hedge funds have steadfastly refused to use basic salaries as a significant lever. Salaries for newly qualified solicitors, for example, tend to be around the £50,000 to £60,000 mark – similar to those on offer in the 'Magic Circle' of top City firms and actually lower than those now paid by some of the more adventurous US practices. For more senior people, such as the sole legal counsel in a small to medium sized fund, where the individual would have at least five years' post qualification experience, the base salary would be around £100,000 – again not dissimilar to pay on offer at a large law firm, in a more traditional financial services player such as an investment bank.
The trump card in the hedge fund hand is, of course, the potential size of an individual's bonus which can easily exceed the 25-50% levels seen in asset management or investment banking and which is virtually unheard of in a law firm. However such a reward structure obviously carries with it a degree of risk and it is no exaggeration to say that lawyers, as a class, are naturally risk-averse. After all, their business is in effect one of risk management and caution is consequently an intrinsic part of their professional training. This means that the potential pool of legal recruits for the hedge fund sector is, in reality, much smaller than it initially appears. Only those relatively rare individuals who are actually attracted by the risk element will be serious players in the recruitment game.
Effective recruitment of in-house lawyers consequently depends on providing and marketing an environment that will appeal to those individuals who have a naturally entrepreneurial approach to business and who will be attracted by the opportunity to contribute to the bottom line of a fast moving and competitive business. It also means developing an environment where the work of the lawyer is demonstrably appreciated and where they are fully integrated into the strategy and operations of the fund. Take the example of Philip Niel, a solicitor trained with Linklaters, who subsequently worked with Barclays Bank and Citigroup before moving on to funds of hedge funds manager, FIM Advisers LLP. According to Niel, "The major attraction of joining a firm such as FIM is the far greater scope to get involved in business decisions as a lawyer than in an investment bank. There are opportunities to operate in a quasi commercial role and, in this capacity, to interact with some of the best brains in the industry. And because of the fact that it's a fast expanding sector it's exciting, intellectually stimulating, and offers the chance to progress very quickly."
The motivators for such a classic in-house lawyer are clear: autonomy, accountability and perhaps most important of all, the chance to operate as part of a commercial management team rather than just as an objective professional advisor.
The end of external providors?
So, as legal advisors within hedge funds start to become the norm rather than the exception, does this mean the end of the road for external providers? According to some of the major firms involved in the sector, the answer to that question is a resounding no. "There will always be a place for external counsel in the hedge funds sector," says Linklaters' Tim Shipton. "Because people like us are dealing with a whole series of houses on a day-to-day basis rather than just focusing on the affairs of one, we can provide a degree of objectivity that can be difficult to maintain in-house. What's important is that internal and external lawyers learn how to work effectively together for the benefit of the fund."
Tim Shipton's view is largely shared by Simon Atiyah of another large law firm specialising in the hedge funds sector, Lovells, who actually seems to welcome the rise of the in-house lawyer. "There are a lot of areas of legal work within a fund, such as the ten minute phone call with a portfolio manager or some of the more straightforward documentation, where it just doesn't make good commercial sense to outsource to an external provider, whereas in other areas such as the launch of new products it's very difficult for an in-house department to come up with the resources of time and people to deliver what is needed to tight deadlines. In my view the proliferation of in-house lawyers is good news all round – not a threat but the basis of a symbiotic relationship. Because we speak the same language in-house lawyers can provide much more effective briefs and exactly the right materials which make life easier all round. Of course nothing is ever perfect and demand for in-house staff can have a negative impact on an external provider – we've had half a dozen lawyers jump ship in the past few years, attracted by what I'd term a more 'entrepreneurial' approach to pay – but it's already started to become a two-way street. I'm aware of several people who have returned to practice because they miss the objective approach to legal advice that you can only really find on the outside."
Despite the challenges inherent in finding and retaining the right in-house lawyer, the effort therefore seems to be a worthwhile one for the ambitious hedge fund manager. Not only will in-house capacity save money directly by obviating the need for outsourcing routine matters, it can also cut costs indirectly through more effective management of external advice and support. And, perhaps most importantly, it can add a new and effective view to the management team, which, if properly handled can help avoid regulatory pitfalls and open up new and more profitable ways of doing business.
Anthony Downie specialises in legal appointments with hedge funds at the legal recruitment consultancy, Laurence Simons International