- June 14, 2017
- Posted by: Vincent Sarullo
- Category: Hedge Funds
Alternative Investments and Public Perception a Key Topic at Morgan Lewis Conference
Influence of Public Perception on Alternative Investment Trends at Morgan Lewis Conference; Chris Cox, former Chairman SEC, and President, Morgan Lewis Consulting, Addresses Public Perception Issue and Key Legislation
Due to public perception of alternative investments, a number of hedge fund trends are on the rise. According to panelists at the 2017 Morgan Lewis “Advanced Topics in Hedge Fund Practices Conference: Manager and Investor Perspectives,” hedge fund managers are adopting a number of strategies to address investor perception and demand, as well as SEC efforts spurred by these perceptions.
Founders Class and Private Equity Investing on the Rise
Public perception has made capital raising a challenge for some funds. Therefore, initiating a “Founders Class” is one strategy many managers have adopted. A Founders Class entices investors to come into the fund early. These early investors in the Founders Class receive reductions in management fees and incentives for early enrollment. Investors see clear benefits and advantages to joining the fund early.
Stand-alone funds are also on the rise, as opposed to master-feeder funds. Stand-alone funds may offer an increase in transparency and liquidity. With public perception making some investors wary of investment strategies that are more opaque and illiquid, stand-alone funds can overcome these perceptions.
Investor demand has spurred an increase of migration to investing in traditional private equity and debt. Traditional private equity/debt investing is less liquid, so fund managers must modify fund terms to address the reduction in liquidity. While illiquidity is a challenge, hedge fund investment in private equity presents several advantages.
“Hedge funds, however, have certain advantages over private equity funds: hedge funds have no restrictions on when a PE-style investment can be made; can easily reinvest capital; and can raise or draw in additional capital for its PE investments.” – Morgan Lewis Conference.
Hybrid or cross-over hedge funds are concurrently on the rise. These funds are a combination of hedge fund and private equity strategies in a single fund vehicle. In these vehicles, a mini-PE fund within a hedge fund is subject to traditional PE fund terms.
Negative perception of “side pockets” is leading to an increase in co-investment vehicles as well.
“A co-investment opportunity is an opportunity to invest in parallel with or in combination with the hedge fund in a particular investment that is generally either too large, restrictive, or illiquid (or all of the foregoing) for the hedge fund alone.” – Morgan Lewis Conference.
Public SEC pronouncements on expenses charged to funds is also influencing hedge fund trends. According to Morgan Lewis attorneys, examples of expenses being scrutinized by the SEC include: travel and entertainment; consulting arrangements; broken deal expenses; and transactional expenses shared among different funds.
Chris Cox, Former Chairman SEC, Addresses Public Perception Issues and Key Legislation
Chris Cox, former Chairman, Securities and Exchange Commission, and President, Morgan Lewis Consulting, weighed in heavily on public perceptions influencing these trends in his Keynote Presentation during the conference. According to Cox, hedge fund investors report the number one problem facing hedge funds is public perception. Excessive fees described in media coverage and opacity feed into a preexisting skepticism of hedge funds. This skepticism is largely a result of a misunderstanding about how hedge funds work.
Cox described how key constituencies — media, public opinion, and investors — drive policy and perceptions. Recently, negative media portrayals and opaque narratives have made investors wary of hedge funds. Likewise, investors have been unsettled by underperformance and are demanding lower fees. Investors are communicating this dissatisfaction to legislators and representatives.
Key legislation Cox touched upon included:
• Repeal of the carried interest loophole
• Reform of the Unrelated Business Interest Tax and its impact on pensions and endowments
• Narrowing of the Choice Act
• SEC approach to General Solicitation with reforms to Dodd-Frank
Congress is underperforming with big ticket legislation on alternative investments, he describes, but:
“Hedge Fund supporters shouldn’t expect to leave empty-handed,” Chris Cox.
Legislative progress on alternative investments may be stymied by a number of factors, but Cox anticipates the most likely event will be the repeal of the loophole for carried interest.
In conclusion, Cox addressed cybersecurity and business continuity planning. His business continuity planning includes emphasis on: redundancy for disaster planning; Homeland Security recommendations; asset management; and communication plans. What will you tell investors and the public in the event of a disaster, Cox asked managers to consider.