Institutional Investor's Alpha Magazine - October 2007 - (Page 74)

ACCOUNTING AND LEGAL SERVICES FOR HEDGE FUNDS firms say their hedge fund clients today place a greater premium than ever on responsiveness and prompt communication. One prominent law firm, New York-based Sadis & Goldberg, opened a San Francisco office in part to help it provide uninterrupted service across time zones, says partner Ron Geffner. “These people are entrepreneurs,” notes Castro. “They can be very demanding. And at the start, they need a lot of handholding in creating an infrastructure from scratch. So it's just a lot more important now to have a client service mentality.” From Boutique to Cradle-to-Grave Service Hedge funds' rising demand for legal work contains at least some good news for large law firms. “Since funds are broadening into new strategies and transaction types, and value capacity and timeliness, price, for the larger funds, is not that significant an issue,” says Stephanie Breslow, partner at Schulte Roth & Zabel in New York. “The hourly rate of your lawyers doesn't matter that much.” But the new challenges may exceed the range of services offered by the boutique providers that have traditionally populated this market, mainly providing formation services. Some firms, such as Sidley Austin and Schulte Rothe, have hedge fund practices of long standing as well as a host of other relevant practices, forming a “cradle-to-the-grave” capacity for their hedge fund clients. Lately, much larger firms with major Wall Street clientele – such as Skadden, Arps, Slate, Meagher & Flom; Akin Gump Strauss Hauer Feld; and Davis Polk & Howard Altman Wardwell – have moved to establish Rothstein Kass & Co. hedge fund formation and regulatory practices in part because they already can provide many of the services, such as M&A, that the funds are going to need. Will this crowd out the smaller players? Not everyone thinks so. Kevin Scanlan, a partner at Orrick in New York, sees a two-level market developing. “There are Estimated Total Numbers 1990-7/2007 (Hedge Funds and Fund of Funds) 10,000 8,000 (NUMBER OF FUNDS) 6,000 4,000 2,000 Source: HFR Industry Report-Special Edition: July/August 2007 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 07 7/07 Q1 Q2 boutique firms that have done fund formation and can now do ERISA work, employment agreements, real estate leasing – all the things the fund manager needs to start out,” says Scanlan. “But they are generally unable to or not interested in advising on sophisticated transaction work, or advising the fund manager on issues that may arise in multiple jurisdictions around the world. And so the boutiques will compete on price for what they do, while the highermargin transactional work and more sophisticated fund formation work will generally go to the larger firms.” As long as talented new people are entering the hedge fund business – entrepreneurs fleeing the more staid environment of investment banking – the boutiques will have their place, Scanlan and others expect. “The more entrepreneurial these funds are, the Stephanie Breslow more likely they are to rely on one firm,” says Breslow. “If you don't have Schulte Roth & Zabel a general counsel, that's what you'll do. But if you have an established in-house legal team, then cherry-picking services from the biggest and best law firms is less intimidating.” The trade-off for larger law firms with a wide assortment of practices is that competition for individual assignments from hedge funds is becoming fiercer. “Hedge funds today need specialists, not just good hedge fund lawyers,” says Mike Schmidtberger, partner at Sidley Austin in New York. That's why large firms are emphasizing the ability of their various practice areas to work together smoothly and, at times, with other firms the hedge fund client might have engaged. It's true, nevertheless, that barriers to entry exist for boutiques that want to broaden out – and even for major Street firms that want to carve out a presence in the hedge fund market. “At the highest end of the practice, there's a tremendous body of knowledge you need – levels of risk, for example, and just how a hedge fund operates as a business,” says Breslow. “For example, how much insurance does my client need to take? This is an area where the lawyers often know more about the business than the clients do, especially when they're starting out.” Depth of bench – the assurance that a firm has partners with long experience working with hedge funds – is crucial for firms that want to become full-service providers in today's more competitive environment. Larger hedge funds are also showing a preference for their law firms to supply an array of nontraditional services. These include developing lists of independent directors and assisting with aspects of due diligence. Another service is helping the fund manage other provider relationships; one example is with fund administrators. Many firms are beefing up their regulatory practices as well. Offshore law firms are experiencing much the same evolution in their role as those based in the US when it comes to serving hedge fund clients. At Maples and Calder, which has the largest practice in the Cayman Islands jurisdiction, “We've found ourselves moving from being a pure legal services firm to a cradle- Photo of Howard Altman courtesy of Jillphotography.com 2 • Alpha Sponsored Report • October 2007 http://y.com

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - October 2007

Institutional Investor's Alpha Magazine - October 2007 Contents Letter from the Editor Longs & Shorts Pension Corner: Applied Knowledge The Good Guys: Autism Advocate Interview: Nerves of Steel Cover Story: Ivy League Education Alpha Awards: Top Service Providers: Trying Times Strategies: Passage to India Profile: The Oracle of Irvine Alpha Bytes: Futurama Research Center: Funds of Funds 50 Unhedged: Commentary: Crisis? What Crisis?

Institutional Investor's Alpha Magazine - October 2007

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