However, Simmons & Simmons is not just restricted to European shores: it also works with 13 of the top 20 US hedge fund groups. As the hedge funds industrybecomes increasingly globalised, and as the large blue chip managers begin to think of themselves as transatlantic, if not global operations, then the requirement is there for their service providers to stay abreast of these ambitions. Simmons & Simmons is indeed well equipped to meet this need.
Full service approach
Some competing law firms choose to specialise in niche aspects of legal advice, but Simmons & Simmons has chosen the full service path, with asset management one of its four strategic sectors. This has certainly paid dividends. As larger hedge fund organisations begin to behave more like mainstream fund managers, and start to encounter the new operational, legal and regulatory challenges that this represents, then it helps to have a legal advisor that is already deeply entrenched in the asset management sector, already advising the giants of long only fund management. But the firm is not just focused on the big name managers: it is aware that today’s start-up could well be tomorrow’s giant. Consequently, all the lawyers in its hedge fund practice have been drilled in the fund set up process, making them well equipped to advise new managers on the legal aspects of brand new fund ventures. The barriers and the obstacles to a successful start-up are myriad, and having a seasoned legal advisor on hand can certainly help to smooth out many of these.
Perry explains that setting up a hedge fund today is not a straightforward process: “It is not about the production of the same set of documents,” he explains. “There are going to be things investors will be asking about and to which we will draw our clients’ attention. We keep up to speed with the legal and commercial requirements, and can anticipate clients’ needs beforehand.”
Thanks to a long track record of advising start-ups, some of which have gone on to enter that cherished top 50 global hedge fund ranking, Simmons & Simmons can apprise new entrants to the industry about new regulatory and operational issues that might otherwise hamper them as they seek to grow their business. Legal problems can easily torpedo a start-up firm if it does not enjoy proper guidance, but beyond that, having a respected industry name on board as legal adviser from the off can assure investors looking at an otherwise relatively unknown manager.
With the larger managers, Simmons & Simmons often finds itself working for fund groups that have simply outgrown the capabilities of a smaller legal adviser, and are seeking advice from a practice that can take them to the next level. This can include issues like cross-border regulatory developments that will affect hedge funds with offices in multiple locations, as well as advising on the appropriate measures needed for promotion of investment vehicles in different markets. As hedge fund firms become larger and more complex, a host of new legal issues can occur. Having a legal advisor who has seen them before can be a big asset.
Navigating the maze
As a consequence of the increased demand for cross-border advice, Simmons & Simmons has launched its proprietary ‘Navigator’ regulatory filter (see box below), an online resource for fund firms that require up-to-the-minute regulatory intelligence on issues that could affect the promotion of their products or their trading activities. In a world where regulatory bans on short selling a particular stock can be pronounced overnight, hedge fund personnel need to be able to draw on accurate information on exactly where they stand from a regulatory point of view.
Navigator already has 170 organisations subscribing to it and covers over 80 jurisdictions. Subscribing clients have access 24 hours a day to the library of Navigator regulatory data. Updates are added to the system within hours. The funds service for Navigator can inform fund managers about a range of factors affecting the sale of funds, for example restriction language within a jurisdiction or whether there is a private placement exemption. It can show which jurisdictions require a fund manager be licensed in order for marketing activities to be carried out. It can even deliver updates on upcoming changes in local law, or the type of information that can be disclosed to a local investor. Navigator is available through elexica.com, the firm’s award-winning legal resource, and can be subscribed to by region or blocks of jurisdiction. It represents an interesting new step in the direction of utilising technology to make the jobs of portfolio managers and hedge fund marketers easier in an increasingly complex regulatory world.
Sound legal advice needed
Since 2008, regulators have moved to suspend shorting of some stocks, for example. Such intervention can happen suddenly, at the behest of politicians. Even more politically sensitive has been the issue of Eurozone sovereign debt and the CDS market, plus the ongoing negotiations between Greece and its debt holders. Funds investing in distressed debt scenarios also require sound legal advice. As the world in general becomes a more litigious place, and the role of hedge funds within financial markets becomes more important, the support of a full service law firm, rather than a niche specialist, becomes increasingly critical.
Another big trend within the hedge fund industry in recent years has been the increased emphasis on intellectual property, particularly for the systematic trading community. Programme-based models and the rights that accrue from them have proved to be contentious as this type of investment strategy has become increasingly competitive. “Intellectual property is now very important if you are a manager with a systematic trading approach,” says Perry. “It has become a highly sensitive and confidential area for successful firms. They are obviously very keen to protect their proprietary systems from misuse by departing employees or consultants.” In this environment, managers are also increasingly aware of the risks associated with new employees seeking to use IP belonging to their previous employer. As a full service firm, Simmons can tap a considerable bank of knowledge on IP and employment law in the UK and elsewhere, advising on practical and contractual steps to maximise protection for valuable intellectual property and confidential information.
The long arm of litigation
Law firms advising hedge funds also need to be fully equipped to cope with the increasing volumes of litigation affecting the alternative investment industry. Simmons & Simmons’ litigation team recently won a major case at the High Court on behalf of a client seeking money from Lehman Brothers and has handled a number of claims against Lehman since the bank collapsed on behalf of clients in the hedge fund space. The legal and regulatory issues surrounding Lehman have been complex, to say the least, and again the nature of these issues has played to Simmons & Simmons’ strengths.
As hedge funds continue to play a more active role as investment organisations in global markets, they are encountering potential legal hurdles to their activities, and they need to be sure of where they stand. In particular, there have been some global macro funds and some debt-based managers involved in sensitive asset scenarios where it has helped to know the litigation risks they might face, both at a local and international level.
A wall of regulation
While there has not been a wave of litigation against hedge fund firms themselves since 2008, Simmons & Simmons has seen a veritable ‘wall of regulation’ erupt across the industry, including a slew of European legislation. And it’s far from over. Sarah Bowles, a partner in the team focusing on regulatory matters, anticipates that her firm will be kept busy advising clients as new legislation, like the AIFMD, continues to be rolled out over coming months. A great deal of uncertainty surrounds the future regulatory map of Europe, and for fund managers with a considerable stake in investor relationships within the European Union, it is critical that they have a legal advisor on hand familiar with their operations who can flag up potential hurdles well in advance.
As we have seen in the past, the regulatory framework can be changed in unpredictable ways, and not necessarily with the practical operation of a fund management business in mind. In addition, new regulation is not always clear, and can be hard to interpret. Simmons & Simmons can call upon considerable resource in this area, as they have been consistently advising a large component of the global asset management industry on European regulatory developments over the years, and will be able to interpret and advise accordingly.
Elsewhere on the regulatory front, hedge funds are facing changes to MIFID and new regulation surrounding OTC clearing and derivatives. Managers have been focused in particular on regulatory challenges in the US in 2011, but now Bowles anticipates a shift in focus to the developments in Europe.
UCITS prominence grows
The rise to prominence of UCITS funds as a distribution channel for hedge funds has also seen Simmons & Simmons demonstrate the advantages of its scale, supporting firms with the writing of KIID (Key Investor Information Documents). It is this same scale that enables it to work with large asset management firms, supporting thousands of share classes across multiple jurisdictions.
With more than 30 partners internationally working on a daily basis with hedge funds, the firm is unlikely to be overwhelmed by a sudden rush of client instructions as can occur at smaller firms as registration deadlines approach. It is this depth of expertise that keeps Simmons & Simmons as the legal advisor for most of the biggest hedge fund groups on the block, and helps to ensure its place as an award winner for the Leading Law Firm.
Partner and Head of Financial Services Group
Perry is involved in transactional, advisory and regulatory work for asset managers and other businesses operating in the financial services sector. He is an investment funds specialist advising on funds of all types and the promotion of investment products, especially hedge funds. He is based in the London office and was made a partner in 1999.
Partner, Member of Financial Markets Group
Bowles specialises in advising investment firms on all aspects of law and regulation applicable to the discretionary management of investments, the provision of investment products and services and provision of advisory services including corporate finance services, both UK and cross border. She joined the firm in 1994 and became a partner four years later.