29 Jul 2010
Investors’ confidence was shaken by the damage caused by the Greek crisis, and saw the average price for hedge fund shares drop to an all time low. Although the average price shows that secondary users continue to be wary of paying too much for assets, the rise does indicate an upturn in confidence.
The 8% rise in the average price has been helped by trading in the ‘near-par zone’ – trades which take place at just below the net asset value of each share. Originally a key driver of trading volume, significant trading in this area has not been seen since before the credit crisis. Previously, investors would offer small discounts for their shares in order to tactically manoeuvre within locked up hedge funds:
“The near-per zone was typically used by investors in locked up funds to raise short term capital or reduce the market risk in their portfolios. When the crisis first arrived, the ability of managers to raise any capital disappeared, and there are virtually no locked up funds around. This, and the fact that investors generally have much greater concerns than liquidity or tactical trading, has made near par trading virtually non-existent”, Elias Tueta, co-founder of Hedgebay said.
“It is a consequence of the change in the basic nature of the secondary market caused by the crisis. Where once the main use of the market was to access high quality, locked up funds, investors are now concerned with mitigating the damage within their portfolios.”
While Mr Tueta believes that near par trading is an interesting development, it is not yet conclusive evidence of what is to come on the secondary market. The return of near par trading in earnest will be the clearest indication that trading patterns on the secondary market have returned to pre-crisis conditions – and that the hedge fund market has finally and fully recovered. Mr Tueta says that the primary market will dictate when this occurs.
“The volume of near par trading is a good barometer of the health of the hedge fund industry. The performance of hedge funds in the primary market will give us a good idea of what we can expect in that regard. The success of capital raising among managers will depend on them sustaining the solid performance we have lately seen in the industry. If this continues, we may eventually see more managers closing to new investors or offering share classes with longer lock-ups, and then we may see the de facto return of near par trading.
Holland & Knight LLP (HedgeCo Blogs) - On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act). The Act has several potential impacts on our clients and within the investment management community.
"This memo is intended to summarize, in general, what we believe to be notable aspects of the Act that impact many of our clients." Scott R. MacLeod, Jay S. Crenshaw of Holland & Knight said, "A more explanatory summary from us is available upon request. However, you should review the Act as a whole to identify specific areas of relevance. Lengthy and detailed write ups regarding the background, impacts, and policy of all areas of the Act are available online."
Unless otherwise stated, any changes in law discussed herein generally are effective July 21, 2011.
I. Adviser Registration
A. If you manage any separately managed accounts and have assets under management ("AUM") in excess of $100 million, then you must register with the SEC (even if you only have one account /client).
B. If you have separate accounts and AUM of $25 million - $100mm, you must register with your home state unless exempt under state law, in which case you must register with the SEC.*
C. If your only clients are investment funds and you have AUM of more than $150 million, also register with the SEC.
D. If you are a non-U.S. adviser with any separate accounts, or with fund assets over $150 million, also register with the SEC unless you have (1) no place of business in the U.S.; (2) less than $25 million in AUM from U.S. clients and U.S. fund investors; (3) fewer than 15 U.S. clients and fund investors; and (4) do not hold yourself out generally to the public in the U.S. as an adviser.
E. If you have AUM of less than $25 million or are exempt from SEC registration, then you must be registered or find an exemption in any state where you have a place of business or more than 5 clients.*
F. If you are a "Family office" or an adviser solely to one or more "venture capital funds" (both terms to be defined), then you are exempt from SEC registration.
*It is not clear what state exemptions may change as a result of the Act; we can help you analyze state law if you fit within one of the noted categories.
IMPORTANT NOTE RE: WHEN TO BEGIN IMPLEMENTING: IF, AS A RESULT OF THE ABOVE, ANY ADVISER NEEDS TO: (1) REGISTER WITH THE SEC; (2) REGISTER WITH ANY STATE(S); AND/OR (3) DE-REGISTER WITH THE SEC, SUCH ADVISER SHOULD SEEK TO IMPLEMENT ANY OF THE FOREGOING ACTIONS WELL IN ADVANCE OF THE JULY 21, 2011 EFFECTIVE DATE, PREFERABLY BEGINNING IN THE FALL OF 2010.
II. Investor Certifications
A. You must immediately amend your fund subscription agreement's definition of accredited investors to exclude primary residence from an investor's net worth. For now, this change seems to apply only to new investors or additional subscriptions from existing investors with no need to expel any existing investors. This change is effective immidiately and requires your prompt attention.
B. IF you are a registered investment adviser ("RIA") and charge performance fees/allocations to any investor in a 3(c)(1) fund, you WILL need to amend to adjust for inflation the "qualified client" certification obtained from each client/fund investor next year.
A. You may need to register with the National Futures Association ("NFA") as a Commodity Pool Operator (CPO) IF (1) you buy commodities and currently rely on an exemption based on margin and notional exposure percentage limitations because you will now need to include any swaps when determining compliance with such limitations, or (2) you are defined as a "major swap participant" when new rules are adopted.
B. You may need to report (1) pre-enactment swaps if applicable regulators issue related interim rules, and (2) future swaps which are not accepted for clearing.
- If you manage funds (whether or not you are a RIA), you will be required to maintain records and file reports to the SEC.
- Such reports will include a description of funds':
o amount of AUM;
o use of leverage, including off-balance sheet leverage;
o counterparty credit risk exposure;
o trading and investment positions;
o valuation policies and procedures;
o types of assets held;
o side letters;
o trading practices, and
o any other information that the SEC deems to be “necessary or appropriate…"
Future rules under the Act MAY require RIAs to take further steps to safeguard client assets.
C. The "Volcker" Rule.
If you are affiliated with a bank, you generally must not engage in proprietary trading activities or sponsoring or investing in a hedge fund, private equity fund or similar entity.
D. "Bad Boy" Provisions.
I further rules are adopted, you will be disqualified from using Rule 506 Regulation D offerings if your firm or principals have engaged in certain improper conduct in the past.
E. Securities Lending.
Within two years, the SEC will promulgate rules designed to raise the transparency of information available to investors with respect to the loan or borrowing of securities.
F. Shorting and Arbitrage.
The SEC may adopt further reporting rules and restrictions on such activities pursuant to the Act.
G. Mandatory Arbitration.
The SEC MAY adopt rules and regulations restricting or prohibiting the use of mandatory arbitration agreements by advisers.
Note from the authors: "This is a very brief summary intended to highlight aspects of rules that are very fact dependent. Please contact us to discuss specific questions."
Varna is a newly formed hedge fund manager based in New York and headed by Svetlana Lee. Following the signing of the strategic relationship, Varna is expected to launch its first fund during the fourth quarter of 2010.
“The long-term performance characteristics of fundamental equity long-short strategies are very attractive, and we look forward to bringing this opportunity to our investors.” Clive Peggram, CEO of FRM, said, “Lee is one of the most talented new equity long-short managers in the industry and we are very pleased to form a strategic relationship with her new firm and to support its development.”
“A firm’s anchor investors are a critical element to a successful launch. FCA is a well respected institutional firm and its significant day one investment will provide us with a strong foundation to launch and grow.” Lee said.
Lee, together with the Varna team, previously managed an equity long-short fund at Citadel’s PioneerPath new manager platform. Prior to that she gained extensive investment experience at leading hedge funds Greenlight Capital, The Baupost Group and Perry Capital. Varna will implement a value-focused, equity long-short strategy that seeks to exploit event-driven situations, structural market dislocations and identify hidden fundamental business value.