London Losing its Allure as a Trading Centre if Guggenheim Partners' Decision Making is Indicative

The politicians don't believe it when the British Bankers Association or AIMA say that tax-paying talent will leave the country, or when supply-siders say that the percentage tax take is hurting growth from entrepreneurialism. But there is evidence. UK based firms (including large cap names) have moved their tax domicile to Switzerland. Hedge fund firms founded and grown in London have opened offices elsewhere in Europe to avoid increasingly high personal tax, and to take some corporate revenue out of the UK. Several high profile leaders of hedge fund firms have left London. 

These are examples of indiginous tax paying people and entities moving outside the scope of the UK tax authorities, but there are also decisions being made not to come into the UK tax environment. London is the long-standing hub for global financial activity in the European time zone. There is no doubting London's historic position and ranking. Their is a complete range of markets in the UK's capital from capital markets to insurance and shipping to commodities and foreign exchange. So the talent pool is broad and deep, and the service support infrastructure is excellent for any sector. It is possible to find lawyers and outsourced I.T. firms and back office capability across the spectrum of tasks in London. London is expensive, particularly for real estate, and the physical infrastructure is strained, but it mostly works and everything necessary to start a business is readily available. 

The positive factors for London may not be enough any more. Guggenheim Partners LLC is a privately held global financial services firm with AUM of $85bn and offices in nine countries. It is setting up a proprietary trading platform to take advantage of the decline in bank trading with proprietary capital. Outside the United States Guggenheim Partners has offices in Dubai, Dublin, Geneva, Hong Kong, London, Mumbai and Singapore. The new venture, Guggenheim Global Trading (GGT), will have an Asian office (place to be decided), and it was a shock to read today that the European office for GGT will be in Geneva.  

These kind of decisions, to not come to London rather than actively leave the UK tax and regulatory burdens behind, are not headline grabbing and not something that can be taken as positive proof of the case. But there is collateral evidence that London is losing its allure as a trading centre.

      


Addition of 12th April 2012
It is unlikely to be related to recent tax changes in the UK Budget, but another hedge fund manager has left London for a lower tax regime. Changes on the FSA register show that the senior investment and operations staff of Tyrus Capital are no longer under the UK regulator's jurisdiction. Tyrus Capital was set up by Tony Chedraoui, the well-regarded former head of Deephaven's European investments, and is one of Europe's top 50 hedge fund firms by size.  Reports suggest that the management of the $2.7bn of assets run on an event-driven basis has moved to Monaco. 

RELATED POSTINGS: 
Hedge Fund Tax Drain (June 2010)
Mixed Messages on Health of HF Business (Nov 2010)

The Top Ten Hedge Fund Stories of 2010

The hedge fund industry is still dominated by America in terms of where the majority of assets are directed and invested. So I have given due weighting to U.S. focused stories in the top ten for the year – they are the first five stories, published by trade press in the States. My own viewpoint and concerns put global and regional stories into the top ten for the year – they are the second five stories here.

Expert Network Insider Trading

Hedge funds' use of so-called expert networks was called into question in late November when more than a dozen money managers were issued subpoenas for information related to a vast government investigation of insider trading.

Among those asked for information—but not accused of wrongdoing—were SAC Capital Advisors, Diamondback Capital Management, Level Global Investors and Loch Capital Management. All stressed they were subjects, not targets of the investigation (the latter, which means the government is likely to bring charges, would likely cause massive redemptions). Loch, which did not respond to a request for comment, is laying off most of its staff by year end, according to Hedge Fund Alert. Firms like Loch and Balyasny Asset Management, which was also subpoenaed, suspended their use of third party research firms as a result.

Drunkenmiller Quits but Team Lives On	"I have had to recognize that competing in the markets over such a long time frame imposes heavy personal costs," Druckenmiller wrote in a one-page letter announcing his plans to retire and close the firm, also citing the challenges of running a large fund.

Duquesne was reportedly down 5% at the time, which would have been the fund's first losing year in 30 if it did not snap back by year end, having returned an average 30% annually since 1986. As of November, fund returns had indeed turned positive, according to Bloomberg.

A group of former Duquesne Capital Management managers prepared to start a new global macro fund, Point State Capital, which will oversee roughly $5 billion, one of the largest launches ever, Bloomberg reported in November. The funds come entirely from Druckenmiller ($1 billion) and former Duquesne investors. In addition Wojtek Uzdelewicz, a Duquesne managing director who ran a roughly $500 million technology focused fund at the firm, plans to launch a fund, Espalier Global Management in New York City.

The Goldman-Paulson CDO Scandal Goldman settled with the SEC in July for $550 million, the largest ever penalty from Wall Street. John Paulson, for his part, was never dragged into the legal mess despite initial concerns that led him to let investors know that he was prepared for a possible legal battle and would personally cover any legal fees. One of those key facts, the SEC said, was failing to disclose the role that Paulson & Co. played in the portfolio selection process and the fact that the hedge fund had taken a short position against the product (Paulson made about $1 billion on the bet). In April, the Securities and Exchange Commission charged Goldman Sachs with defrauding investors by "misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter." FrontPoint's Annus Horribilis FrontPoint Partners, the once highly successful hedge fund firm, had a difficult year. In October, FrontPoint announced it was spinning out from Morgan Stanley, which had acquired the firm in 2006 when it managed $5.5 billion but was concerned about new hedge fund investment restrictions under the Dodd-Frank Act. But as FrontPoint restructured, an insider trading scandal hit its healthcare hedge fund, causing the suspension of portfolio manager Chip Skowron and the liquidation of the fund. FrontPoint faced large redemptions—reportedly as much as $3 billion of $7.5 billion, according to the Wall Street Journal—from skittish investors as the insider trading probe spread to more than a dozen hedge funds and put unwanted attention on the use of expert information networks. Buffett's Hedgie Successor Until late October, Todd Combs was a successful but largely unknown manager of a small Greenwich, Connecticut hedge fund. But Combs was thrust into the spotlight with the announcement that Warren Buffett has chosen him to manage a large chunk of Berkshire Hathaway's roughly $100 billion investment portfolio, one of the most high-profile money management positions in the world. Combs, 39, ran Castle Point Capital Management, a financials-focused long/short equity fund launched in November 2005 that managed $405 million as of September. The fund was down 3.93% through September, with a net annualized performance since inception of 5.93%, unspectacular performance compared with its peers. Hedge Fund UCITS Mushroom Whilst service providers and some of the managers were over-excited about the prospects of UCITS versions of hedge funds last year, in 2010 there have been some strong growth trends. There are now around 350 UCITS hedge funds, most of which have mildly amended mandates of the mother (offshore) fund. There have been some UCITS only fund launches, but not many. Early evidence is that UCITS provide a solution to the major drawback of hedge funds that was revealed in the Credit Crunch – the ability to deal in the funds at will. 76% of UCITS hedge funds offer daily liquidity, 21% offer weekly liquidity. The buyers of UCITS hedge funds are client types that put a premium on this positive feature – HNWIs that were much aggrieved at being locked into offshore hedge funds and are buying through wealth management networks; and insurance companies that have problems of admissability of assets when putting capital into offshore funds. UCITS hedge funds manage €27bn of capital. JP Morgan takes a BRIC Hedge Fund Bias JP Morgan's 2004 partial takeover of Highbridge Capital for $1.3bn was the deal which said that institutional flows into hedge funds were believed to be for real and for some time. Eventually Morgan bought all of Highbridge. In October this year JPMorgan Chase & Co. agreed to acquire a majority stake in Brazil's Gavea Investimentos Ltda., the fund manager founded by former Brazilian central banker Arminio Fraga. Gávea Investimentos has $5.1bn AUM invested in hedge funds and illiquid investments, and has a staff of 103 people. The hedge fund industry in Brazil is dominated by bank-run domestic retail flows, but JP Morgan likes the international appeal of Brazilian hedge funds. There are many international investors who use Brazil as a proxy for the best of the BRICs – high employment and industrial production growth, an appreciating currency, a relatively sound fiscal position and a commodity play to boot. One of the lessons of the post-Crunch period has been that the appeal of emerging markets to investors in developed markets has recovered as well as the prices of iron ore and coffee. Has the JP Morgan deal for Gavea confirmed that emerging market flows are for real and for some time? Renaissance is Back In 2006-7 there was a feeling abroad that Renaissance Technologies was going to eat the lunch of a lot of hedge funds by soaking up the flows into the industry as it looked to take in as much as $100bn into the Renaissance Institutional Equities Fund (RIEF). However the large capital inflows turned into outflows when RIEF was down 16% in 2008 and down 7% in 2009. The Renaissance Institutional Futures Fund (RIFF) fared no better in 2008 - it was down 12% when most CTAs were up on the year. The reverse happened last year – RIFF was up 5% and most CTAs were down. Overall firm assets were down 25% last year, and to cap it all founder James Simons retired as CEO at the end of 2009. After successor co-CEOs Peter Brown and Robert Mercer considered closing the two institutional products, it as well they didn't. This year RIEF International - Series B is up 17.00% YTD, and the Renaissance Institutional Futures Fund is up 17.14%. The latter fund did well enough on a 12-month risk adjusted return basis to win the Best Managed Futures Fund at the AR Awards in November. Renaissance is back. The Eurocrats Take a Grip In America the intense interest of politicians, regulators and the media was such that Anthony Scaramucci, founder of fund of funds Skybridge Capital, said "We have felt like a piñata - We certainly felt like we've been whacked with a stick." But it is the European end of the industry that will suffer more from actual interference. The politicians and Eurocrats have wilfully failed to understand the significance of their proposals, despite lobbying and submissions from the industry. The hedge fund industry gives employment, tax revenues and invisible export earnings – in return the industry got proposals treating all management companies as publicly quoted, regulations on how private companies should pay their employees, damaging increased disclosure of short positions, and little-island-thinking that would have created a fence around the European hedge fund industry. On top of that the UK, home to most of the European industry, increased tax rates to an extent that it has pushed some hedge fund companies and leaders into other tax jurisdictions. The country, continent and industry are not the lands of opportunity they were. Recovery by Madoff Receiver The story which has come back with new developments through the year is the efforts of receiver in the case of the Madoff ponzi scheme, Irving Picard, to recover cash from the 2,000 or so net beneficiaries of the scheme. These are the investors who withdrew more money than they invested with the fraudster, and around a thousand of them have been in the sights of the receiver. The list of banks, intermediaries, investors, friends of Madoff and counterparties to receive suits form Picard is long. Some have been obvious targets, like the 34 affiliates with ties to Madoff feeder fund Fairfield Greenwich Group. But he has been very thorough and looked through to where the "profits" have been deployed. For example, in July the court-appointed trustee took aim at three Madoff family entities, a family fund, an oil and gas properties business and a trading business, seeking $30 million that the family had invested in them. As the deadline approached for the receiver – he had until the 11th December, the two-year-anniversary of Madoff's arrest, to file the suits – activity accelerated. Picard reached a $625m settlement with Boston billionaire and philanthropist Carl Shapiro this month, and on the last day for possible filings, the receiver filed a suit against Austrian banker Sonja Kohn and dozens of firms linked to her for $19.6 billion—all of the principal he estimates was lost by Madoff's investors and more than twice as much as he has sought in any of the thousands of other lawsuits he has filed since Madoff's arrest two years ago. The single biggest settlement to date was $7.2 billion from the estate of Madoff investor Jeffry Picower.

 

Proposed EU Short Selling Disclosure Regulations Bad for Large HF Groups and the Market

Proposed short selling disclosure regulations announced in the week before last by the European Commission (EC) are too stringent and threaten market efficiency in a general sense. Specifically, implementation of the regulations as currently drafted would be very damaging for larger hedge fund groups.

Shorting and Market Efficiency

Hedge funds, along with proprietary trading capital, dominate the shorting of shares. Day traders and individual punters short shares in the United States, but most shorting is carried out by hedge funds. A number of studies have demonstrated that the ability to sell short contributes to the accurate and efficient evaluation of financial instruments. For example the paper “The Importance of Short Selling”, published in September 2009 by the Asia Securities Industry & Financial Markets Association makes the case: In markets with bans on short selling, market participants with negative information that do not hold inventory of securities will be constrained from selling and their information will not be fully reflected in the prices of the instruments. Further restrictions on short selling can in this way increase the magnitude of over-pricing and subsequent corrections or reduce the speed of price adjustment to private information, according to this and other research. So impediments to short selling can impact market efficiency.

Disclosure to the Regulators

The newly created European Securities and Markets Authority will have the power to temporarily ban short selling altogether. It is proposed that investors will need to disclose short positions to regulators if they exceed 0.2 per cent of a company’s issued share capital, and to the rest of the market if the short position exceeds 0.5 per cent. The proposed regulations would also require that short selling of government debt be disclosed.

Visibility of short positions to regulators is not much of an issue. It will be something of an administrative chore to report all short positions greater than 0.2% to a regulator, and then all subsequent changes to such positions, but it is do-able. This new reporting activity will be part of the long-standing trend for compliance and administrative matters to be an increasing drain on hedge fund company profitability. Of more significance is the impact of public visibility of hedge fund short positions.

Disclosure to the Markets

Does this matter? Yes it does for market efficiency, but also because of the potential for more frequent and even more exaggerated short squeezes, and also for the impact on the managers' edge(s).

For a short position to be publicly visible it would have to be equivalent to 0.5% of the outstanding capital of a European listed company. Immediately I will look at the materiality of this level for hedge funds, and follow on with the impact it could have.

A key question becomes "How big would the fund have to be for the largest short positions to be visible to the market?” The majority of shorts amongst European equity managers are STOXX 600 Index constituents. Not that hedge funds don't short mid-cap names, but they have a profound preference to short liquid securities.

The smallest company in the STOXX 600, Europe's index of blue chips, Solarworld AG, has a market capitalisation of €1.008 bn. So a €2m short position in Solarworld would be known to regulators and a position of €5m would be known to the whole market.

The most concentrated equity hedge funds are "focus funds" which run with concentrated portfolios of what are considered the best ideas of a manager. Such a fund might have 25 long positions and 10 short positions with a gross balance sheet of up to 120% of equity. A typical balance sheet disposition might be, say 75-90% long and 15-30% short. This would make a typical short in a concentrated equity hedge fund 2-4% of equity.

Taking the larger end of the typical band, a focus-style equity hedge fund might have the largest shorts sized at 4% of the equity. If the largest short of a hedge was in the smallest of the stocks in the universe its significance for reporting is a function of the fund size. So a €100m concentrated-style hedge fund portfolio might have a €4m position in Solarworld, equivalent to 0.4% of the shares outstanding. That means the equivalent proportion short position would have to be 1.25x larger in absolute size to be visible to the market. Or to put it another way, the short position would be public knowledge at a 4% portfolio position for a €125m sized hedge fund

Materiality of Public Disclosure for More Typical Equity Hedge Funds

Most hedge funds are not of the "best ideas" or concentrated portfolio type. For most equity hedge funds a 2% short would be a large, or conviction position. So, for the way most hedge funds in Europe manage their portfolio shapes/positioning their largest short positions will become visible to the world at large if they manage €250m or above. If you run a €500m hedge fund a typical 1% position would become public knowledge if it were a company at the bottom end of the capitalisation of the invested universe. If a manager looks after a 1bn hedge fund portfolio invested in European large caps, a 2% conviction short position would be known to the wider world if the stock in question was in the ranked lower than 303rd in the STOXX 600 Index by capitalisation.

The same manager who runs €1bn in European equities would have to disclose in a publicly visible form a typical 1% short position if the company in question were in the bottom 123 stocks in the STOXX 600 Index.

UK-Focused Funds May be Particularly Impacted

The public visibility of short positions of UK equity focused hedge funds could well be more problematic for the managers than for managers of European equity hedge funds. UK-focused hedge funds tend to invest in mid and large cap stocks. The universe for them is within the constituents of the FTSE-350 Index, and the smallest 350 Index constituent is TR Property Investment Trust. A £177,000 short position in TR Property would be known to regulators and a £443,000 short position would be visible to the whole market, that is €205,000 and €515,000 respectively. The median sized FTSE-350 Index constituent has a market cap of £1.1bn, so a typical UK focused hedge fund position would be disclosed to the whole market for a holding valued at £5.5m (€6.39m).

Short Squeezes and Anticipated Flows

Transparency of short positions in shares to the whole market can be very damaging. Even when the specific fund or trading house with the short position is not known, market level data is tracked assiduously so that shares known to have large short interest are periodically ramped to shake out the loose shorts. The extreme case of short squeezing in Europe took place in October 2008 when Porsche engineered a short squeeze in Volkswagen shares. VW shares appreciated 82% in a single day to become for a brief time the world's biggest company by market value. The squeeze put the Trident European Fund out of business.

But it is not just in the extreme case that short squeezes are damaging to the party that is short - right through market history there have been examples of rallies in low-quality counters that persist because of pressurised buying, that is buying for short-covering. Stock price behaviour thus changes in a bad way - stocks with low betas can become high-beta plays on market moves because the markets knew there were big shorts. UK retailers acted that way in 2008, and many highly-leveraged companies had violent up-moves in the middle of 2009, for examples.

When traded markets have specific holding information and know about large-scale flows into or out of hedge funds then market-makers change prices adversely and proprietary capital traders position against the fund flows. This happens when a fund has big redemptions and has to liquidate large equity holdings, and also when large flows in (subscriptions) turn into portfolio trades. It can happen in event driven investing - when the European Commission stopped General Electric taking over Honeywell in 2001 the shorts in GE and longs in Honeywell were killed. It also occurs in other markets. Adverse pricing happened in the market for MBS in 2008. When the leveraged loan market imploded in 2008 primebrokers and banks seized the loans of some funds and dumped them into a market with no bids. When Amaranth controlled one side of the natural gas futures market there was no exit route feasible for the size of trade. So the disclosure of position level information to the general market can have adverse impacts on hedge funds in extremis, but also impacts hedge funds routinely and periodically in more normal times of market action.

More Frequent Squeezes and Short Position Asymmetry

In part the suffering of hedge funds on short books is a function of the peculiarities of shorting. When long positions are successful the position size goes up, and when longs go wrong the position size shrinks. For shorts the opposite happens. When short positions go wrong (the share price goes up) the position size increases, and successful shorts shrink in position size as the share price falls. So the psychology of shorting is difficult and they are problematic to manage in a portfolio. At the best managers have to decide whether to add to successful shorts (to maintain size), at the worst managers have to decide where their pain threshold lies when shorts go wrong.

One unintended consequence of short position disclosure rules is opening up hedge fund managers (and the capital of their clients) to more frequent and potentially exaggerated short squeezes. The second consequence may be more damaging, which is the attrition of the intellectual property of the managers.

Information, Intellectual or Flow Edge

Hedge funds are partly paid their management fees to be the best informed investors on the Street. Historically for Michael Steinhardt, and currently for Steve Cohen this means being the first call for analytical information from the sell-side such as estimate revisions and recommendations, and also being kept well briefed about market flows, blocks and positioning. For hedge fund firms like Polygon, Och Ziff or Maverick the founders intend their funds to be advised by the best fundamentally informed investors on the Street. High quality analytical minds are brought to bear on specific sectors so that the analytical staff has the intellectual edge on their stocks under coverage. This may require paying for primary data research (shop footfalls for example), or using expert networks like Gerson Lehrman or AlphaSights. Arguably firms like Odey Asset Management and Lansdowne Partners combine bottom-up analytical edge with a fiercely intellectual macro-economic fundamental element to the process.

Less so for trading-oriented firms like SAC but certainly at most hedge fund firms, portfolio managers prefer to have core, long-held positions, even on the short side. Although shorts tend to be traded more than long positions, still and all, fund managers like to have stable long holding-period shorts. These high conviction shorts are sometimes called structural shorts. They have to be held for solid fundamental. well-researched reasons.

When The Children's Investment Fund and its manager Chris Hohn came to prominence in 2004/5 a fan club developed along the lines of that seen around the investment strategies of Warren Buffett. When filings with the SEC disclose that Buffett has bought a new stock many followers do the same. Hohn's fund got to a size that often positions were big enough to have to be publicly declared. After they were known to be in his fund, investors piled into the same positions. The investment process at TCI is almost painfully detailed in its depth before a new position is initiated. There are dedicated analysts and data trawling is exhaustive. A significant safety margin is built into purchases, so the value evident has to be significant at initiation. For those hoping to enjoy the halo effect of Chris Hohn's selections the investment process is a lot shorter - if TCI owns it that is good enough for them. The TCI holdings used to enjoy a significant uplift in price when they became public knowledge, so there was some benefit to the investors in the Fund. But in essence the fan club purchasers were piggy-backing on the work done by The Children’s Investment Fund Management.

Something analogous is plausible as a consequence of the disclosure of short positions as proposed by the EU. Whilst it is unlikely that the man-in-the-street will replicate the significant short position that they see Gradient Capital have put into place, one of the fears of hedge fund managers is being in a crowded short for all the reasons given above.

Bad for Hedge Funds and Bad for Market Efficiency

Increased visibility of shorts will not only allow for more short squeezes, but the intellectual property or information edge of hedge fund managers will be under threat at the margin. Shorting is difficult enough without the pressure on the short book P&L from increased transparency. The proposal from the EU to disclose short positions should be resisted in its present form. It would be bad for hedge funds and bad for market efficiency.

The Hedge Fund Registration Act Ensnares Non-US Funds

Up to now overseas-based investment advisors to offshore hedge funds did not have to register with the SEC. It used to be that the American system of fund regulation was based on regulating the products that were sold, rather than the firms carrying out the business. The old form of regulation was about mitigating mis-selling of products to individual investors. So a form of investment that did not allow unqualified investors in a fund regulated in another country (offshore hedge funds) was not covered by domestic US regulation. John Doe of Main Street was not allowed into hedge funds, and the funds were not allowed to be marketed to retail investors in the United States. So there was no need for protection of the little man.

Today, offshore hedge funds are still not allowed to be marketed to retail investors in the United States, and unqualified investors still may not buy hedge funds. However, first there was the enforced registration of all (domestic) hedge fund advisory firms, and now the the US legislators have gone a step further by seeking to regulate non-US entities with hedge fund clients in the United States.

In the first week of this month the US Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Bill"), which contains The Private Fund Investment Advisers Registration Act of 2010 (the "Act"). The Act requires all private fund investment advisors to register with the SEC, whether they are US-based or overseas-based.

It is a curiosity, at the least, that the SEC has this role. Speaking to a House Financial Services subcommittee this week, SEC Chairman Mary Schapiro said “it’s really not clear” what (systemic) risk, if any, the hedge fund industry presents. Even if she is not clear, I am: it is quite feasible, given the scale and activity scope of hedge funds that in combination hedge funds can have systemic impacts. In the UK this addressed through the FSA monitoring exposures of the largest hedge fund groups operating in its jurisdiction. The hedge fund industry assets are not managed by many groups, so this focus on the bigger groups is very sensible and practically readily achievable. The SEC should follow suit and limit the number of hedge fund groups it (or another regulator if it doesn't want or see the need for such a responsibility) tracks. However that is not enacted by the new US hedge fund legislation, and the scope is broad, too broad.

That written, there is, I should point out, a Foreign Private Adviser Exemption, but the criteria are set at a level that all non-US hedge fund groups would have a business aspiration to exceed. The Act provides a limited exemption from registration for a "foreign private adviser", which is defined as an investment adviser that: (i) has no place of business in the U.S.; (ii) has in total fewer than 15 clients in the U.S. and investors in the U.S. in private funds that it advises; (iii) has less than $25 million (or such higher amount to be determined by the SEC) in assets under management attributable to clients in the U.S. and investors in the U.S. in private funds that it advises; and (iv) does not hold itself out to the public in the U.S. as an investment adviser, or advise an investment company registered under the Investment Company Act of 1940, as amended (the "Investment Company Act") or a business development company. 

It might take a few marketing trips to bring in 15 US clients to a European or Asian hedge fund, but it is certainly do-able for a Billion Dollar Club member (or a fund with a track record of more than two years) to have that number already. And $25m of US-sourced capital as a threshold will exclude few commercially-sized hedge funds

And what is a "business development company"? Does this include an offshore marketing company that an overseas hedge fund group might have in place to mitigate tax payments within the hedge fund management company?

Also, who is this regulation for, who is it protecting? The likes of CalPERS and other giant state pension plans, sophisticated family offices like the Rockerfeller Foundation, the Endowments of Harvard and Yale, all invest in hedge funds, but given they are qualified investors and large in their own right shouldn't they operate under a "buyer beware" philosophy?  To repeat, the man in the street in the United States cannot buy a domestic hedge fund, still less an offshore hedge fund. 

A few consequences of the implementation of this Advisers Registration Act are: that the costs of being in the hedge fund business have gone up again, reinforcing the tendency for the industry to concentrate; non-US funds will find it more difficult to obtain seed capital from US-based incubators and early stage backers; the Gucci tasseled loafers/Bass Weejun penny loafers division within the hedge fund industry will be reinforced. Across the Atlantic we are being forced apart from our American cousins in hedge funds, by the EU Commission and the US Congress.



Addition of 22nd July: a comment from Andrew Shrimpton, Member at Kinetic Partners: “The expanded authority of the SEC will have a far reaching effect on the alternative investment industry, both in the US and in Europe. Not only will asset managers who handle significant assets in the US now be required to register, they will also be faced with more onerous compliance and monitoring obligations. Therefore, managers in the UK and Europe need to consider whether they are obliged to register with the SEC and respond appropriately to the heightened scrutiny and new demands.”

According to Kinetic Partners SEC registration will have the following bring with it the following requirements of managers: 

•  comply with applicable SEC filings such as the Form ADV I, Part II and accompanying Schedule F;

• develop a compliance manual, code of ethics, employee investment policy (personal account dealing policy) and a compliance monitoring programme that meet with SEC requirements and industry best practices;

• undertake an annual review and testing of the compliance programme; and

• undertake annual compliance training.

Where applicable, firms should also consider their global group structure and how the Bill may affect non US managers within their group. For example, many managers operating in the UK also have an offshore, non US, manager which delegates to the UK. 

This posting used information made publicly available by law firm Seward & Kissel LLP and a press release from Kinetic Partners.