Attended the first in a series of Walkers Fundamentals Hedge Fund Group Seminars. The Nov. 6 event was ominously titled, “Fighting the Tape…” A unique discussion on protecting and growing a hedge fund business in volatile markets. For those unfamiliar, Walkers is a leading law firm focused on “offshore” jurisdictions including Cayman, Jersey, Dubai, London and Hong Kong.
The afternoon session started with an introductory presentation by the Cayman Islands Monetary Authority (CIMA). Ms. Yolanda McCoy provided some numbers around Cayman’s leadership position among offshore jurisdictions – as of 9/30/08 over 10,000 funds in Cayman and 153 offshore administrators (. She saw no downtick in registrations with 1441 this year vs. 1406 in 2007.
The first talk was entitled “Managing Distress”
The speakers discussed the four leading causes of distressed situations from their clients
1. Lehman exposure
2. Liquidity not available for redemptions
3. Internal issues – personnel, etc.
4. Good funds that are being redeemed to generate liquidity
To successfully address these issues, the good attorneys at Walkers counsel the following four golden rules:
1. Comply with documents
2. Comply with fiduciary responsibilities – maintain best interests of investors in mind for every decision, treat investors fairly and ensure that mechanisms – gates, etc – are used for proper purpose
3. Consult advisors early
5 mechanisms to address a distressed situation
1. Side pocket the illiquid assets
3. Redeem in kind
4. Suspend redemptions
5. Restructure fund
The most problematic solutions for managers and least desirable for investors are to redeem in kind. To address this challenge, the attorney’s introduced the “Synthetic Side Pocket.” I would not do it justice to explain, however, it involves creating a SPV that retains rights to the return of the illiquid asset and the pro rata distribution of the entity in the form of shares to the existing investors and kept separate from new investors. I was not the only one in the room that tilted their head and squinted at that one.