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Hedge Funds Round-Up

September 26, 2017

Urban Skyline

Larger institutions such as public pension funds, bank trust departments, and other institutional investors have included hedge funds in their portfolios as a means of increasing diversification. Hedge funds can invest in a wide range of assets, and often utilize a complex array of risk management and portfolio-construction techniques.

Hedge funds can operate with greater flexibility than other forms of funds such as mutual funds, and are often used for a wide range of purposes. 

Hedge Fund News and Developments

Capitalworks Plans to Launch London Hedge Fund Business
Capitalworks, a South African private equity firm, plans to launch a London-based business which will provide operational and financial support for hedge funds. The venture, Sephira Investment Advisors, is the first major initiative in Britain for Capitalworks. 

Capitalworks will provide a regulatory platform for the funds, and will help fundraise in order to inject cash from its underlying investors. Some hurdles the project may face include relatively subdued growth outlooks for African markets, and continued uncertainties regarding the impact of Brexit. Capitalworks is one of South Africa’s largest private equity firms, with an estimated $515 million in assets under its management. 

Hendry Hedge Fund Closes 
Money manager Hugh Hendry is closing his main fund, Eclectica, after a 9.4% slump this year. The firm ran for 15 years prior to closure. Hendry cites various factors for the closure, such as increased costs of running a hedge fund, and regulatory/commercial considerations. The fund shrank from $1.3 billion in total assets in 2013 to $30.6 million at the end of August 2017.

Hedge Funds May Lose Tax Benefits
The carried interest structure is a central aspect of many hedge funds. Carried interest refers to the share of profits that hedge funds and private equity firms earn from the investments they make (typically 20%). It is taxed at lower rates than ordinary income through a tax loophole. 

However, according to Treasury Secretary Steven Mnuchin, the presidential administration is pushing to remove the benefit of carried interest from hedge funds by the end of this year. Mnuchin made the comments on carried interest at the seventh-annual Delivering Alpha conference. Other entities may still be able to utilize the tax break. 

UBS Yuan Hedge Fund Launch
Union Bank of Switzerland announced a plan to create a yuan-denominated hedge fund in China. The Asset Management Association of China gave UBS approval to raise money from mainland investors in the onshore bond and equity sectors. 

After Fidelity International, the Swiss bank is the second foreign institution to access China’s mainland hedge fund sector. Fundraising for UBS’s project is expected to be completed this year; the company still needs to decide whether the fund will initially focus on bonds or equities. 

Rene Buehlmann, Asia Pacific Head of UBS Management, says that he expects China to gradually open its capital markets and capital accounts, allowing international investors to have more ways to invest in the China market. 

Foreign funds previously could only set up minority-owned, joint-venture mutual fund companies with Chinese partners. Now, global asset managers are gradually being allowed to create private funds in yuan, allowing them direct access to mainland investors’ money. These changes are part of China’s overall governance and policy shifts encouraging an opening of its markets.

Projected Factors for Hedge Funds 
According to a global survey conducted by Preqin, a majority of hedge fund managers (73% of those surveyed) viewed performance as the leading factor to drive change in the hedge fund industry in 2017. This was followed by issues regarding investor demand for more favorable fees (64%), and market volatility (38%). 

Increased regulation of alternative asset funds was also cited as a main consideration. In 2016, hedge fund manager respondents viewed transparency around risk as the main factor for hedge funds to address rather than performance. In 2017, only 29% of the respondents considered it a leading factor. 

Notwithstanding such factors, the flexibility and diversity of hedge funds can create unique opportunities for investors. In the Fortis case structured by Kessler Topaz Meltzer & Check and Grant & Eisenhofer, support from a hedge fund that specializes in third-party litigation funding allowed the case to proceed while still conforming to European rules which bar lawyers, but not third parties, from receiving contingent fees.

What Hedge Fund Regulation Could Mean for You

The legal issues and regulations surrounding hedge funds can be complex. If you have any questions or inquiries regarding the rights of hedge funds, contact us at Kessler Topaz for more specific information regarding our services, such as our Securities Tracker Portfolio Monitoring Services, which we provide at no charge for each of our clients.  

Our client base is comprised of more than 250 institutional investors around the world, including public pension funds, Taft-Hartley funds, mutual fund managers, hedge funds, and other large investors. We have been entrusted to lead some of the most important cases litigated in our field, and have been responsible for many of the largest recorded plaintiff’s recoveries both in the U.S. and globally.