When it comes to hedge funds, law firm Simmons & Simmons enjoys a significant advantage over its competitors – one of the company’s partners provided legal advice to the first hedge funds set up in London – and the firm has built on this first mover advantage ever since.
Years of experience in the hedge funds industry combined with a client base that has grown from simple hedge fund structures to much more complex organisations has produced an almost unparalleled level of expertise and understanding of the alternative asset management industry. The company’s roster of clients includes top UK hedge fund brands such as Brevan Howard, BlueCrest, Blackrock, Lansdowne, Marshall Wace and Egerton.
Colin Leaver, the partner who heads Simmons & Simmons’s asset management sector, says that the firm’s expertise has been built up “because of the quality of our client base” and the fact their clients’ requirements have evolved over the years, from needing advice only on core regulatory requirements, fund formation and corporate structuring, to needing advice in a large number of related areas such as tax, derivatives, regulation affecting trading, dispute resolution and human resources.
The breadth of hedge-fund related services which the firm provides is particularly important for larger hedge fund managers who are “keen on having lawyers advising them who actually understand their industry and what they do,” says Leaver.
In the London office alone 30 out of the 118 partners are fully focused on asset management issues, providing one of the broadest offerings of legal services available. Some of the names include Iain Cullen, Richard Perry and Steven Whittaker, who have advised on the establishment of some of the largest UK hedge fund managers, Sarah Bowles and Darren Fox on regulatory issues, Martin Shah who co-leads the financial services tax practice, Julian Taylor, Mark Hewland and Andrea Finn on employment law and human resources issues and Colin Leaver in the corporate group leading the team on hedge funds. Simmons & Simmons not only has a strong team of practitioners who can provide expert advice to clients but has also been able to retain their staff over the years, with departures a fairly rare occurrence.
For a legal practice that has been around since 1896, Simmons & Simmons is refreshingly 21st century, using innovative tools such as Navigator, a proprietary regulatory internet service providing information on issues affecting hedge fund managers, and podcasts in which partners discuss hot regulatory topics and draw attention to what funds may need to deal with. One of the company’s offerings is also the elexica website, an online collection of legal knowhow published in eight languages and available on mobile phones.
All of these innovations are particularly valuable in an environment where the regulatory challenge is constantly evolving and where hedge fund managers are actively in need of advice on fast-moving legal requirements governing alternative funds.
While the company’s hedge fund practice in London has what Leaver calls “critical mass” – a combination of knowledge, reputation and the sheer number of people on the ground – over the last year the company has also been active in boosting its presence in both Asia, where its Hong Kong office is the centre of its hedge funds practice, and in the US.
In October the company formed an alliance with the eminent US law firm Seward & Kissel to specifically focus on hedge funds and asset management. The alliance gives Simmons & Simmons hedge fund clients access to all Seward & Kissel’s fund-related services in New York including fund formation and management, advisory services on regulatory, derivatives, tax and employment issues, and transactional services. Seward & Kissel also has an office in Washington which focuses on regulatory work.
“The alliance is purely aimed at the asset management sector and what we have aimed to do is pull together what we believe is the best offering in Europe and Asia with one of the best offerings in the US,” says Leaver.
The hedge fund teams in the two firms have worked closely for many years and the alliance came as a natural fit, particularly as a long list of regulatory changes including Dodd Frank, Volcker, FATCA, derivatives position limits, AIFMD and the European transaction tax began affecting managers in both regions.
Leaver notes that the timing of the alliance was very opportune, “because it came at a time when we were fielding more and more questions about regulatory issues in the US and similarly our colleagues in the US were being asked more and more about regulations in Europe such as AIFMD”.
In the early stages of drafting the AIFMD US fund managers took little notice of the changes coming out of Brussels, but now that the finer details are being spelled out there is growing interest from managers in North America about how they will be affected. One such instance has been the final set of guidelines on remuneration provisions for alternative investment fund managers which the European Securities and Markets Authority (ESMA) published in February.
After a transition period the new regulations will also affect non-EU fund managers who market funds to EU investors when they become effective in July this year. To help non-EU clients navigate this legal maze Simmons & Simmons has recently published Ten Things Every US Manager Should Know About AIFMD on its elexica website.
Compared with the US and Europe where regulators continue to steamroll ahead with reforms while economic growth in both regions remains meagre, Asia has been the mirror image of this with explosive economic growth and intense investment opportunity accompanied with a much more sedate pace of regulatory change. However, the situation in Asia is changing and local regulators are beginning to keep pace with what is happening in other regions. In Hong Kong, the centre of the firm’s hedge fund practice, the local regulator, the Securities and Futures Commission, has been upping the ante recently, increasingly looking at cases of financial misconduct such as insider dealing. It is part of a drive by the territory to become a serious competitor and the region’s go-to financial centre.
“Hong Kong and Singapore can’t afford to be seen to ignore what is going on in the New York and London; they don’t want to be seen as “easy” jurisdictions for the global financial services community,” says Leaver.
Asia’s growing asset management industry remains a strong focus for Simmons & Simmons and the company is planning on boosting its presence there with new hires in its long-established Hong Kong practice and a new office in Singapore which should open later this year (once regulatory approvals are obtained) to complement already existing operations in Shanghai and Beijing.
In Singapore the company will initially be licenced to practice international law. The company’s Asian offices cater to a mix of fund managers – funds spun out of local investment banks and the Asian offices of the larger European and US managers – providing the same suite of services as in Europe. “The decision to expand in Asia is a logical extension of what we already do as a number of our clients already operate either in Hong Kong or Singapore,” says Leaver.
In Europe regulation will remain a key issue for the rest of this year, “keeping every hedge fund manager on his or her toes not just in the UK but across our whole European network,” says Leaver.
One of the key pieces of legislation, the long awaited Level 2 Regulation, was finally published in December last year spelling out the details of AIFMD. “Now that there is more certainty about AIFMD we are just beginning to drill down with our clients as to how they will deal with that, how they will restructure if they need to restructure and how they will comply with it,” says Leaver.
The slew of regulatory issues is unlikely to abate any time soon with regulators in Europe still due to agree on the finer points of the European Financial Transaction Tax and future incarnations of UCITS regulation. Once such regulation is formalised a separate headache for financial institutions will be how to comply with co-ordination which has not been harmonised such as AIFMD and UCITS or different derivatives clearing and position limits rules in the US and in Europe.
Separately from regulatory issues the investment climate remains frail. M&A, a previously thriving area – the firm in the past advised on many of the largest M&A transactions in the sector – has slowed considerably.
The environment for raising capital remains difficult and even those managers, perhaps teams who would have spun out from investment banks’ proprietary trading desks and six or seven years ago would have had no problem with raising money, are now finding it hard. Nevertheless, start-ups are still happening and the firm has been involved in four recently – one from an existing fund manager and three new launches, says Leaver.
The seeding of funds also remains active and here a trend is for investors seeding the fund to ask for equity in the managers as part of the seeding arrangement.
One of the consequences of the tougher financial environment has been an increase in demand for employment advice given that investors are much more probing about fund performances and are quick to withdraw assets if that performance doesn’t match their expectations. Managers have been looking more closely at the make-up of their investment teams and a frequent response has been to part company with staff whose performance was not up to scratch.
“This often leads to either a dispute or a possibility of a dispute and our employment team has been very busy recently,” says Leaver.
Equity markets have had a new lease of life since the beginning of the year but the economic picture in both the US and Europe remains fragile. Despite the signs of recovery in the markets it is not a given that it will be either fast or even sustained. Against this backdrop and the ever-shifting regulatory ground it remains crucial to have access to a competent and experienced legal team that can provide support with necessary advice. Simmons & Simmons remains well placed to provide that advice to hedge fund managers over years to come.