From our vantage point as advisers to many of the world's top investment fund managers and financial institutions, broad market forces flow through to our instructions, and ultimately drive many of the terms of the funds we advise.
In this four-part series we look at the current themes we have noticed in the investment funds market. Parts one ( here) and two focus on Hedge Funds and parts three and four explore Private Equity.
All data, unless referenced, is taken from Walkers' in-house investment funds survey.
REDEMPTION TERMS – HARD LOCK-UPS INCREASE THEIR LEAD
More funds are using lock-ups at launch, up to 44%, which represents an increase from the longer term trend in prior years (about one-third). While one year lock-ups remain the most common (47%), 43% employed lock-ups of 18 months or greater. Two-thirds of lock-ups are 'hard lock-ups' – i.e. investors cannot redeem at all (as opposed to 'soft lock-ups' where redemptions are possible but subject to a fee for the benefit of the fund).
The increasing use of gates in fund terms continued this year, with 29% of funds surveyed using a gate to manage redemptions.
It is market practice to appoint independent directors to the board of a corporate hedge fund. However, while most new funds still appoint independent directors (69%) the slowing of this trend, which we first identified in our 2017 survey, has continued this year. Independent representation is still below our pre-2017 observed levels. While the drivers for this trend are diverse among managers, one explanation is the increasingly institutional managers of Cayman funds with advanced internal control and governance processes, coupled with oversight from other independent service providers. Other funds posit that they employ novel strategies and trading approaches where independent oversight may be regarded as less essential (which may or may not be widely accepted). For others, there are simple sensitivities to costs at the start-up phase.
The selection of an appropriate board continues to be a critical process on which managers should focus, and guiding managers through these processes remains a key part of our role as Cayman counsel. As Walkers does not offer directorship services to investment funds, we remain unaffiliated with any particular service provider.
FUND TERMS IN ACTION: NAVIGATING STRESSED SITUATIONS
Beyond fund launches, this year's industry commentary has noted several high profile and long-established funds commencing their wind-down, or electing to turn into family offices to manage the principals' capital. In addition, market forces and investors' own allocation decisions have seen many funds dealing with redemptions from their largest investors, or otherwise restructuring to position for expected market turbulence or in response to global regulatory developments.
While all of these situations have their own features, as adviser to many of these funds Walkers has seen some clear trends emerge.
Funds with clear, flexible documentation have more options in addressing unforeseen stresses. Managers that maintain a close and open relationship with their investor base can propose restructurings or other solutions that may not be directly contemplated by the fund's documents. Communication is key: managers that engage early with investors, directors and legal counsel can often leverage the experience of each to implement effective solutions.
WHAT'S IN STORE FOR 2020?
We have a lot to watch in 2020. Given the continued global uncertainties and the volatile global economic and financial environment, managers and their funds will continue to position themselves for further turbulence. This may well be beneficial for the industry – after years of fighting a broadly rising market, dislocations in asset prices should be opportune times for hedge funds, and investor sentiment surveys do not suggest a material allocation away from the sector. As ever, our role in this broader picture is to help our clients put themselves and their funds in the best position to adapt to the unforeseeable.
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