This year is on track to be the slowest new-fund market since 2001, but the lawyers who midwife start-ups say they have been as busy as ever. What’s lacking in quantity is more than made up for in fund complexity, as funds look to do more business abroad. “Markets have become tougher in the U.S., so more managers are looking at foreign markets,” says John Broadhurst, a partner at San Francisco–based firm Shartsis Friese, who oversees the firm’s hedge fund practice. “This creates more tax planning and regulatory compliance work. We’re doing a lot more consulting in that area.”
Shartsis Friese seems to have come through with flying colors: Hedge fund managers this year rate it the top onshore law firm. Though the 55-lawyer firm has traditionally catered to smaller hedge fund clients than its megafirm competitors, it is the favorite this year among hedge funds with $1 billion or more in assets, suggesting that, in these trying times, even big funds are turning to law firms with a reputation for hand-holding.
In the 1980s, Shartsis Friese was one of the first law firms to advise the then-budding hedge fund industry. Clients were often castoffs from bigger firms that didn’t consider them lucrative enough to take on. “The large law firms weren’t particularly interested in that business and were happy to refer anyone who came to them wanting to start a hedge fund to the few little specialty law firms like us,” says Christopher Rupright, a Shartsis Friese partner.
Broadhurst credits Shartsis’ personnel scheme — the firm has 28 partners and just 27 associates — as one of the keys to its success. “We’re fairly top-heavy,” he explains. “When a client retains our firm, they’re going to get a whole lot of partner time. We try to make sure that we’re bang-on as far as returning phone calls and being extremely responsive.”
The effort has paid off. Shartsis Friese ranks first in both Client Service and Document Preparation & Fund Formation. Close on its heels is Sidley Austin, the Chicago-based firm that slips to second overall after two years at No. 1. Where Shartsis Friese boasts its hedge fund focus as a strength, Sidley Austin markets the fact that it doesn’t specialize, says Michael Schmidtberger, a New York–based partner.
“We’re not a hedge fund law firm,” says Schmidtberger, co-head of Sidley Austin’s 110-lawyer investment fund advisers and derivatives group. “The cornerstone of our practice is investment management in the broadest sense, and our hedge fund clients benefit from that breadth of perspective. This strength has been more acute in the credit crunch, but it has always been the case with our practice. We aim to treat the whole patient.”
Schmidtberger says its broad expertise gives Sidley Austin the tools to untangle an array of hedge fund problems that this year have included restructurings triggered by redemptions and a heightened demand for the often complicated acquisition of distressed assets as managers seek to take advantage of the economic downturn. The firm represented Lone Star Funds in July, when Merrill Lynch & Co. sold $30.6 billion in collateralized debt obligations to the Dallas-based buyout fund for $6.7 billion.
New York–based Seward & Kissel (No. 3, down from second) has confronted similar demands. “There are fewer launches than there were several years ago, but the quality of the launches tends to be more serious and better funded,” says John Tavss, managing partner of the investment management group. “Clients are needing more help.”
Seward & Kissel — which in 1949 helped establish the first hedge fund, A.W. Jones & Co. — draws on its partners’ depth of experience. Each partner in the investment management group has been with the firm for at least ten years.
“We know the issues,” Tavss says. “We devote considerable resources to educating ourselves and our clients regarding business and regulatory developments.”
New York–based megafirm Schulte Roth & Zabel holds on to fourth place overall and is the third-favorite firm among hedge fund firms that manage at least $1 billion. In addition to its huge hedge fund practice — of its 480 lawyers, 108 focus exclusively on hedge funds — the firm has a substantial structured-product arm, which has served it well this year as a growing number of distressed funds look for opportunities in discounted assets.
Akin Gump Strauss Hauer & Feld drops two places, to fifth, in this year’s ranking. The firm’s hedge fund group has 72 lawyers and has made a push in recent years to expand into emerging markets. In January 2007 it opened a Beijing office with a full-time fund-formation lawyer, to complement the firm’s offices in London and Moscow.
Growth is brisk offshore as well, as evinced by a milestone in Grand Cayman, the heart of offshore activity: The number of hedge funds registered with the Cayman Islands Monetary Authority broke the 10,000 mark this summer, reaching 10,299 as of September 30. “If you want to work in the hedge fund space, you need to be in Cayman,” says Mark Lewis, senior hedge funds partner at Cayman Islands–based Walkers, which ranks as the top offshore law firm overall, up from third place last year. Small firms also designate Walkers as their favorite. In the Cayman office alone, seven partners and 27 staff lawyers work full-time on hedge funds.
Walkers’s hedge fund practice has been the primary driver of the firm’s business, which has evolved along with the industry. “Offering documents have evolved over time to meet constantly changing market conditions,” says Lewis. “The challenges facing managers today in dealing with redemptions, valuations and side-pocketing of underperforming assets were simply not contemplated a number of years ago.”
Fund restructurings have kept the firm busy this year. A three-partner Cayman team does nothing but advise funds that run into difficulties. As the industry has grown, Walkers has also expanded its global reach: The firm now has offices in the British Virgin Islands, Dubai, Hong Kong, Jersey and London.
Maples and Calder is a close second in the offshore race, surpassing other firms in two categories: Business Planning & Corporate Finance and Client Service. It’s also the firm of choice among hedge funds with $1 billion or more in assets. In 2007, Maples and Calder increased its Cayman office staffing by 30 percent, adding 27 lawyers. “That’s huge growth for us,” says David Brooks, head of the firm’s investment funds group. “And we’re pleased to say our lawyers are still busy.” Brooks estimates that the firm advises on the formation of almost 40 percent of Cayman-registered funds. The firm’s administration business, Maples Finance, is also growing. In July that division, with more than $32 billion under administration, opened its seventh office, in Dubai.
Ogier, headquartered in Grand Cayman, slips from the top slot it held for two years to No. 3, though the firm still earns top honors in Document Preparation & Fund Formation. Ogier represents 250 hedge funds, including about one fifth of the Hedge Fund 100, Alpha’s ranking of the world’s biggest single-manager hedge fund firms. Last year, Ogier helped $1.3 billion Absolute Capital Management Holdings restructure four of its equity funds, the first major hedge fund restructuring resulting from the credit crisis. (Absolute was hammered by investor redemptions in September, after the sudden departure of its CIO.) Peter Cockhill, a partner at Ogier, says the case exemplified his firm’s dexterity: “We have the ability to help hedge funds from the cradle to the grave, rather than from the cradle to the first $100 million.”
Offshore Law Firm
MARK LEWIS
Senior Investment Funds Partner, Walkers
What will the lasting effects of this crisis be?
A significant overhaul of the U.S. financial and regulatory system, and the era of deregulation and laissez-faire economics is probably well and truly over. Fundamentally, although a free market economy may be a good thing, some degree of regulation is required, as the market cannot always rely on people in powerful positions to make the right choices.
Is there an international component?
Yes, I anticipate a greater degree of cooperation between the regulatory agencies in the U.S. and overseas, as well as more caution from investors. Investors will generally be more aware and more conscious of getting value. And bank lending ratios will undoubtedly tighten.
How do you interpret the government’s recent temporary but aggressive moves against short-selling?
It suggests that some form of restriction on short-selling will remain, including extended reporting requirements. There has also been some speculation that the uptick rule may be reintroduced.
Onshore Law Firm
JOHN BROADHURST, CHRISTOPHER RUPRIGHT
Partners, Shartsis Friese
When might a recovery begin?
Rupright: With the ample uncertainty about the scope and nature of potential government bailouts, regulatory changes and the economy, markets will continue to be very volatile.
Will there be lasting effects?
Broadhurst: In past cycles, when markets have suffered significant losses — 1987, the early 1990s and 2001–’02 come to mind — investors subsequently attempted to reduce volatility and limit downside risk. In the hedge fund world, this means seeking funds that hope to deliver high single- and low double-digit returns, with low volatility. However, this low-volatility approach loses momentum as markets improve. Investors seem then to migrate to funds that have the opportunity for significantly higher returns but are subject to dramatically higher risk. This requires investing with more leverage and in more obscure instruments and markets. The risk then goes up, at some point markets go down, significant losses are incurred, funds fail, and the cycle begins again.
