Traditionally viewed as a racy older cousin in asset management’s multifaceted family, hedge funds have found their way into the mainstream mentality in recent years, if for no other reason than the column inches their activities have generated.
It’s not just awareness of the vehicles that has been on the rise though, with the actual number of funds in the market and the activities they carry out multiplying too.
According to the Financial Services Authority, the vehicles account for roughly half of all trading on the London and New York stock exchanges, while a recent study from International Financial Services stated that a record $126bn (£62.97bn) of new money flowed into the global hedge fund industry in 2006, nearly tripling the sum raised in 2005.
With such a profusion of activity in the hedge fund arena, plenty is going on to keep the lawyers occupied. But who has actually benefited from the hedge funds’ ascendancy? Is the marketplace still dominated by the handful of players that got involved during the industry’s murky infancy, or have the monoliths started moving now that hedge funds have achieved a degree of respectability?
If the latter is the case, what kind of conflicts are the big firms risking, given that hedge funds will undoubtedly vie with existing clients when making an acquisition?
In short, the industry is still dominated by a few ‘prime mover’ firms, namely Dechert and Simmons & Simmons, with US firm Schulte Roth & Zabel gaining market share in recent years. To complicate matters, though, as the hedge fund industry has matured and become more complex, a variety of larger firms have begun acting for certain vehicles, albeit from within existing and diversified practice areas. Clifford Chance, for example, acts on the formation of certain large activist vehicles, drawing input from lawyers across a number of practice areas.
Similarly, Allen & Overy (A&O) has been involved in the transactional side of activist hedge funds in the past couple of years, although it does not act on any raisings of funds.
Peter Astleford, a partner at Dechert, first entered the hedge fund arena while at Linklaters in 1986, acting for then start-up vehicle Gam. Astleford concedes that the nature of the legal advice hedge funds receive has changed, with lawyers acting while the vehicles raise funds and their managers gain authorisation, as well as seeing them through an ever-widening range of transactions, offering tax advice and structuring partnership agreements. However, while the number and size of funds has increased exponentially since his first foray into the industry, Astleford says the firms acting for them remain largely unchanged.
“Dechert, Simmons & Simmons and Schulte Roth do most of the work, with eight or nine others competing to get a 5 per cent share of the market,” he says.
While he worked at Linklaters when his hedge fund career began, Astleford says the firm never developed its practice in that area and is now fighting for market share alongside the likes of Akin Gump Strauss Hauer & Feld, Clifford Chance, Lovells, McDermott Will and Emery and Slaughter and May.
Tim Spangler, head of global investment funds at Kaye Scholer, agrees that a small number of firms retain most of the business generated by hedge funds. He points out, however, that there are still rich pickings to be had by new entrants to the market.
“The opportunities here are so great and the number of truly established providers is relatively small compared to the number of clients that are out there,” he says. “The strategic and monetary value to law firms is huge.”
While Dechert, Schulte Roth and Simmons have established client bases and offer a full service in terms of fundraising and beyond (Simmons, it should be noted, does not do work in the US, while Schulte Roth does not do litigation), larger firms are undoubtedly gaining market share when it comes to the new generation of hedge fund work.
A&O, for example, is well known for having advised the consortium of hedge funds that backed Malcolm Glazer’s controversial takeover of Manchester United FC. The firm also advised hedge funds Och-Ziff and Perry when they put up some of the cash for the management buyout of fashion retailer Peacocks, blurring the line between traditional hedge fund activity and private equity practices.
Andrew Ballheimer, managing partner of corporate at A&O, says: “That was a transaction where hedge funds took all the equity and led in a way they hadn’t previously. We don’t do the raising of the funds because that’s a different market, but we’re very active on the transactional side.”
While Ballheimer says the firm has acted on around 10 hedge fund deals in the past year, he adds that A&O does not have a team dedicated to the industry, with general corporate lawyers working on the deals as they arise.
To put this in context, Dechert’s hedge fund team has around 30 lawyers working across its London and US offices.
At Clifford Chance, which has acted on structuring and establishing hedge funds for clients including Aspect Capital, Barclays Capital, Man Group and Merrill Lynch, there are four lawyers within the fund formation group who focus on hedge fund work as it arises.
Nick Benson, a partner in the private funds group at the firm, admits that Clifford Chance is not as prominent in the fund formation area as firms like Dechert and Simmons. That said, he points out that Clifford Chance tends to focus on the larger, usually multijurisdictional, vehicles, leaving the smaller funds that are the bread and butter of the industry to smaller players.
“We do large, complex fund formations, which in the hedge fund world isn’t the norm,” he says.
The picture at Linklaters is similar, says partner Stephen Culhane, with the firm acting on large cross-border funds that need several layers of regulatory advice, for example.
However, for these larger firms, particularly when acting for activist vehicles, the possibility of client conflict is a far more tangible threat than for the long-established hedge fund-focused partnerships.
According to Ballheimer this is no more marked than it would be with other clients.
From Benson’s point of view, if a conflict were to arise Clifford Chance would continue to work for existing established clients at the expense of continuing with the potentially lucrative hedge fund work.
The growth in the hedge fund industry is undeniable, with enough work around for everyone to benefit to some degree. As the vehicles have made the transition into mainstream consciousness from their former niche position, the mainstream law firms are making their mark as specialist advisers, while the niche players continue to nurture their longstanding corner of the market.