Customisation, co-investments and credit

Customisation as much as possible attracts bigger tickets but it only makes sense in an efficient structure. “We are setting up SPCs for existing and new managers. They are a good way to do co-investments, launch segregated portfolios more quickly and save costs compared with a fresh fund. Though an SPC is one legal entity, its assets and liabilities should be segregated in protected cells and there is limited recourse language that should preclude creditor claims from other cells,” says Crabb.

The team recently hosted a session on co-investments that lured several hundred listeners who wanted accessible and digestible information on the topic. “All strategies can do co-investments, but they need to be very bespoke to the liquidity and asset class. We have experience across equities, digital assets and other areas,” says Crabb. “Co-investments are especially popular in credit, and we also see them in equities and macro. We are also seeing inflation funds investing in swaps and securities,” adds Firth.

In credit, Simmons runs the gamut from daily dealing funds to those with multi-year lockups: “Credit launches and spinouts can be liquid, illiquid, or half-way between,” says Firth. The breadth of Simmons’ coverage as a corporate law firm also comes into play: “In credit, we not only advise on funds, but we also have a huge finance team to structure a broad range of diverse underlying credit fund transactions,” he adds.

Cost pass throughs

Some fund structuring features can move in and out of fashion. Cost pass throughs were especially popular in 2023 with multi-strategy managers and their competitors, but Firth sees less interest or the implementation of more limited forms of pass-through in 2024 for several reasons: “Those who wanted a pass through have already done it and there are concerns about sustainability: should individual team or pod performance fees be paid if the overall vehicle is flat or down and does not earn a performance fee? There is also some operational complexity for managers to deal with”.

Seeding deals, other models and start up advice

As well as winning new business from established managers, Simmons estimate that they have acted for 1 in 3 hedge fund start-ups in Europe in recent years, based on information from prime brokers.

Not everyone needs or wants a traditional seed deal: “There is some fatigue with seed deals and managers with critical mass will launch autonomously as they do not need a huge anchor investor taking a revenue share,” says Saksena. Crabb is seeing enhancements to the model that can also assist with third party asset raising: “Revenue sharing deals reach the next level by introducing other investors, and we also see acceleration capital deals”.

Simmons’ LaunchPlus package distils key legal decisions and advice into an easily accessible format, and the next version(s), starting with LaunchPlus 2.0 will add more domiciles to reflect the firm’s global footprint, as well as information on seed deals and side letters.

Simmons urge startups to contact them to seek early-stage advice on term sheets with seeders and so avoid potentially onerous restrictions on their commercial and employment freedoms, amongst many other pain points that are perceived to misalign interests between seeders and startups. Simmons’ Manager’s Guide to Seed Deals, shared confidentially with The Hedge Fund Journal, provides tips on ensuring that the uninitiated make strategic decisions in order to ensure that any misalignment is either highlighted at the outset or otherwise provided for in a way that reduces the manager’s risk of ending up in a seed relationship with a material chance of failure.

Non-compete, non-solicit, intellectual property and other agreements with either seeders or previous employers can be sources of disputes, and the legal framework around non-competes is evolving in countries such as the UK and US. Simmons has used its employment lawyers to help negotiate amicable exits and agreements on IP. “For example, we recently sold IP from one manager to another manager, and we have very close experience of multi-strategy funds’ employment and compensation arrangements,” reveals Firth.

Simmons also claims to be competitive on costs for startups, and more competitive than some US firms.

Cayman – the king of domiciles

Setting up a Cayman fund is still a relatively quick process. Often the longer part is setting up the onshore management entity and obtaining regulatory authorisation.

Regulatory authorisation delays, sometimes still blamed on Brexit issues, have been a source of frustration for some launches. But Firth is also finding that many new managers still take a short-cut: “Hosting platforms can allow managers to get to market in a few months rather than waiting 6 to 9 months for an FCA license”.

Simmons has expertise in forming management entities and investment vehicles in multiple jurisdictions and has in recent years discussed various structures in Ireland, Singapore and mainland China, amongst others, with The Hedge Fund Journal. Some managers have vehicles and corporate structures in multiple domiciles, but Cayman remains king for investment vehicle domiciles. Simmons works with most Cayman law firms to a greater or lesser extent. “But we are lead counsel and we are in the driving seat – alongside the commercial arrangements on fees, liquidity and strategy, we need to make sure that offshore funds are set up to work with UK specific disclosures and other UK requirements. For example, for tax reasons a UK manager cannot hold all the voting rights in a fund, unlike many US managed structures,” explains Firth.

Growing global footprint

Simmons is present in 23 countries as of August 2024. In Europe the original London office is complemented by the two leading EU fund domiciles, Luxembourg and Ireland, both opened over the past 10 years. Saksena spent two years in Dublin launching the office which has gone from two people to having space for 100. “Dublin now does regulation, tax and litigation for international clients,” he says. Elsewhere in Europe, the firm is present in Belgium, France, Germany, the Netherlands, Italy and Spain.

Even in countries such as Sweden and Switzerland (amongst the top five European countries by hedge fund assets) where Simmons has no office, it has relationships with local law firms and hedge funds who might use local counsel for domestic matters but choose Simmons to advise on investment vehicles, global distribution and more. At least one manager based in Switzerland and featured in The Hedge Fund Journal’s 2024 “Tomorrow’s Titans” report on rising star hedge fund managers lists Simmons on its monthly factsheet.

In international financial centres in Europe, Firth also works on Jersey and Guernsey vehicles.

Asia

In Asia, Simmons has offices in Hong Kong SAR China, Beijing, Shanghai, Shenzhen and Singapore, as well as an alliance with a local firm in Tokyo. Singapore is another hotspot for launches attracted by the low taxes, talent pool and lifestyle. Saksena also chairs Simmons’ India group, where he is excited about the investment returns and opportunities. and has forged deep relationships with local law firms: “We have been launching funds investing in India for a long time and advise on tax treaty access from domiciles including Singapore, Cayman, Ireland and Luxembourg”.

Gulf

In the Middle East, the main office is in Dubai UAE, with another in Qatar and a network in Saudi Arabia. Simmons’ Middle East office in Dubai, led by Muneer Khan, has worked with more than 30 leading hedge fund managers setting up offices in Dubai International Financial Centre and Abu Dhabi Global Market, and the firm is also opening an office in Saudi Arabia. Though larger hedge funds setting up shop in the Gulf have been most publicised, Simmons has also seen larger and smaller launches in the region keen to be closer to the vast pools of capital.

US alliance and Private Fund Rules

Since 2012 Simmons has operated an alliance with New York headquartered Seward & Kissel. Though Simmons clients can and do work with other US law firms, Simmons has a super-collaborative relationship with Seward & Kissel. Seward & Kissel partner Debbie Franzese has featured in The Hedge Fund Journal’s 50 Leading Women in Hedge Funds report published in association with EY, and its Private Markets: 50 Women Leaders 2024 report published in association with Citco.

The relationship with Seward & Kissel is growing stronger and stronger. There is a two-way traffic of secondments across the Atlantic between the two firms: “Most of our senior lawyers have spent time at their offices. We have a rolling programme of senior lawyers from Seward such as Kevin Cassidy (recent investment management partner) and Brad Fay (recent ERISA partner) spending time with us here in London,” says Saksena. “The whole is more valuable than the sum of the parts and we are truly integrated,” underscores Firth.

Collaborative culture and loyal staff

Simmons take pride in being super-collaborative, not tolerating prima donnas, and being a decent place to work. The firm provides thin pickings for those journalists who salivate over the frisson of talent wars and poaching stories. Longevity of tenure is prized and is helped by the variety of internal and external secondments throughout Simmons’ office network and its client base. “Over the last year, we’ve had associates on secondments to Singapore, the US and the Middle East,” says Firth. “I have worked in Paris and for a UK firm, an Australian bank as well as Seward & Kissel in New York,” says Crabb.

Multiple specialist practices

“One-stop shop” is probably the cliché most over-used by a huge variety of service providers that are simultaneously retained by many hedge funds, but Simmons can demonstrate impressive breadth. Beyond fund formation, multiple specialists in employment, data protection, intellectual property, litigation, contentious regulatory and tax also support hedge funds in these areas.

Simmons are regular speakers at prime broker conferences on a whole swathe of topics from AI to TCFD and ESG, AIFMD II, MiFID II, GDPR and much more. Firth, who was an early mover on ESG, has helped over 200 firms to design their ESG polices and engages in ongoing ESG dialogue with industry groups such as AIMA and The Investment Association as well as regulators including ESMA. Firth speaks at multiple events, and a webinar on the new UK SDR rules pulled in over 1,100 listeners. For ESG within firms, Simmons’ Diversity & Inclusion Toolkit is helpful, and the firm takes pride in its own record and aspirations on diversity and social mobility.

“We want to be cutting edge on all of these new regulations and have the breadth and depth to look after managers running large and complex businesses,” says Saksena.

Regulation

Simmons plays an active role in the industry working with trade associations such as AIMA and MFA and can be proactive on regulation. “Our contentious regulation team including Tom Makin, Emma Sutcliffe and Caroline Hunter-Yates distilled client feedback from the hedge fund industry and broader financial institutions into a response to the very concerning FCA enforcement consultation that controversially proposes publicising investigations before they conclude. We will continue to engage with our clients and advocate for the industry in relation to this issue,” says Saksena.

Insights gleaned from the financial institutions practice were also helpful in preparing hedge fund clients for the UK FCA’s Senior Managers and Certification Regime (SMCR). In conjunction with a compliance firm, Simmons’ Alexander Brown pulled off an impressive coup, unblocking the GDPR/SEC issue that had seemed intractable for some time. This had delayed EU advisers registering with the SEC for fear that GDPR would prevent them from sharing documents with SEC examiners.

AI regulation

AI is not just an investment opportunity but also a new area of regulation to comply with. If managers sell into the EU or have another EU nexus they need to observe the new EU AI legislation. “We have AI specialists – our Global AI Lead and Disputes and Investigations Partner Minesh Tanna, Partner Jayne Bentham and Managing Associate Amy Sumaria – who all really understand hedge funds. Confidentiality responsibility is also a key issue for users of AI,” says Firth. The UK’s new government is also introducing AI legislation.

Cryptocurrencies

Crabb was prescient on cryptocurrencies, is asked to speak at client and industry events, and is viewed as a leading onshore counsel in what is a very jurisdiction-specific asset class: “I took a view that the asset class was going to be very relevant to a lot of managers. We believe in, and support, the crypto industry. We launched our first crypto manager in 2017 and advise other managers who want to start trading digital assets. We have significant expertise in this area”.

Simmons acts for a wide range of fund managers across the crypto spectrum, from emerging managers launching management businesses and dedicated digital asset funds, to established managers seeking to diversify into cryptocurrencies and crypto derivatives. Simmons advised the first UK FCA authorised crypto-focused AIFM on the set up of their fund and successful FCA authorisation process. Since 2017 Simmons has acted as lead counsel on 30¹ bespoke digital asset fund launches domiciled in the Cayman Islands, US, Jersey and Luxembourg.

“We regularly advise leading managers on regulatory, structuring, tax and other considerations when starting to trade digital assets within their existing fund structures. We are currently instructed on several active digital assets fund launches for established and emerging managers in the Cayman Islands, Jersey and in Luxembourg. We advise many digital assets fund managers on global distribution queries,” says Crabb.

Simmons’ monthly Crypto View update on legal and regulatory developments is sent to more than 800 clients and its Crypto Reviewer searchable online database is constantly updated with information on licensing, token categorisation, issuance, lending, AML, marketing and research.

Crypto advice draws on specialists elsewhere in the firm, such as George Morris, Partner in the Digital Business Group, crypto regulation expert Gordon Ritchie, who did a webcast on UK crypto marketing rules, and Tax Partner Martin Shah; the HMRC has broadened the UK Investment Manager Exemption to cover crypto.

The explosion of exchange traded crypto launches of ETFs and ETPs is another trend that Simmons does not want to miss out on. “We also have significant experience in advising managers on the viability of crypto ETFs and the launch of Bitcoin ETPs,” says Crabb.

How far can advice be automated and digitised?

Simmons has automated some areas of advice to expedite and save costs on operational routines around global distribution, consumer rules, choice of exchanges and other venues, and margin related issues around netting and collateral. Simmons has for years been creating increasingly AI friendly packages: Navigator, Consumer Duty Toolkit, Trading Venue Reviewer and Netting and Collateral Reviewer. “We have commoditised this sort of advice initially into a matrix table format and are now digitising it with AI bots that locate the answer. The reason is simply that many hedge funds need the same advice, so we would rather standardise it. For instance, clients might want to check the rules on reverse solicitation in a particular jurisdiction. On Netting and Collateral Reviewer, clients can plug in the inputs and the tool generates a report that can be saved as an audit trail,” explains Firth.

Inside the firm, Simmons has also developed an advanced generative AI tool called Percy powered by Open AI’s GPT 4. Will AI steadily replace human lawyers? “AI is enhancing our products and offerings very substantially and provides an extra dimension on top of our automated drafting systems. It can be particularly useful in the context of side letter analysis and can lend a hand to drafting certain parts of fund documents such as risk factors. Even so there is no substitute for lawyers learning manually how to draft complex provisions – for example deferred redemptions language – and to understand the legal side and nuances,” argues Saksena.

For now, the hedge fund industry is a people business and the key people at Simmons are driving the widespread recognition of the firm. The London hedge funds team is perennially ranked Tier 1 by Legal 500 and Chambers and Partners and boasts the largest number of individually ranked hedge fund partners as well as many senior associates individually noted by Legal 500 and Chambers.