United States: Perspectives From In-House And Private Practice: Cadwalader Special Counsel Garret Filler Discusses Hedge Fund Culture, Law Firm Selection And Counterparty Risk (Part One Of Two)

Last Updated: September 22 2016
Article by Cadwalader, Wickersham & Taft LLP

Most Read Contributor in United States, August 2018

Garret Filler recently rejoined Cadwalader, Wickersham & Taft as special counsel in the firm's New York office, where he represents both start-up and established hedge funds and private equity funds, as well as family offices, banks and broker-dealers. Filler assists clients with forming investment management firms and pooled investment vehicles; complying with regulations applicable to investment advisers and funds; and negotiating trading, credit and operational agreements. Prior to rejoining Cadwalader, he worked at start-up hedge funds and at several large hedge fund managers, including Citadel, D.E. Shaw and, for nearly a decade, as general counsel and chief compliance officer of Ellington Management Group (Ellington).

The Hedge Fund Law Report recently interviewed Filler in connection with his return to Cadwalader, during which he discussed numerous topics of import to hedge fund managers. This article, the first in a two-part series, sets forth Filler's thoughts on the cultures of private fund managers; selection of outside counsel, including law firm relationships with regulators and their willingness to enter into alternative fee arrangements; and counterparty risk. In the second installment, Filler will discuss family office transitions into asset managers; broker-dealer registration issues for fund managers; considerations when negotiating counterparty agreements; the implications to hedge funds of increased capital and liquidity requirements for banks and broker-dealers; and the impact of new margin requirements for uncleared derivatives.

For additional insight from Cadwalader partners, see "Best Practices for Hedge Fund Managers to Adopt in Anticipation of Enactment of FinCEN AML Rule Proposal" (Aug. 4, 2016).

HFLR: You worked in-house both at start-ups and at Citadel, D. E. Shaw and Ellington. From the perspective of a former insider, how are the cultures of private fund managers similar to each other, and in what ways do they differ?

Filler: An enduring attribute of private fund management firms, whatever the size, is that the culture is established by the founders. To launch a private fund manager, it helps enormously if the founders have a successful investing track record – the longer-running the better. That prior success provides the basis for their self-belief, along with their willingness and ability to risk their own personal assets to start a high-risk business in a competitive marketplace. The fund founders I've known have all been extroverted, confident, ambitious, smart and comfortable with complexity, uncertainty and ambiguity.

On the other hand, there can be significant differences between fund founders, too. Private fund founders can be detail-focused, or they can have a big-picture orientation. Some are very theoretically-minded, while others weigh experience and observation more heavily.

HFLR: To follow-up, do fund terms tend to differ between start-ups and well-established managers?

Filler: Except in a few rare circumstances where a start-up manager is essentially oversubscribed and can set the terms of its new fund almost unilaterally, start-up managers are in a substantially different position from large existing managers when it comes to establishing and negotiating investment terms, such as fees and lock-up periods, with investors.

At one extreme is the start-up manager who has all of the critical business terms dictated to him or her almost unilaterally by prospective investors. In those cases, you'll typically see things like lower fees and greater liquidity even as compared to other managers in the same strategy. You might also see managers granting investors greater transparency into portfolio holdings.

At the other end of the spectrum, there are examples where the manager voluntarily closes the fund to outside investors, so it doesn't have issues with respect to fees, liquidity or transparency.

In between are large managers with long track records of success that remain open to outside investors. They are understandably able to negotiate more favorable terms with investors than start-up managers. For example, they might set higher fees or more favorable expense terms. They might have longer lock-ups and reduced transparency into portfolio holdings. They might even, subject to applicable law, be less willing to provide information in response to investor inquiries and requests.

HFLR: How does a private fund manager select outside counsel?

Filler: To a great extent, private fund managers select outside counsel using the same process as any other business; they often use a similar process to the way they select other important service providers, such as basing the decision on pre-existing relationships or the recommendation of an industry colleague.

When a private fund manager is searching for counsel for a new matter, there's no one path to finding an outside lawyer, and usually, there's more than one person who can do a great job. Asking for a referral from a friend at a fund manager that's in the same (or an adjacent) strategy certainly increases the odds of identifying a subject-matter expert. Sometimes, a Google search of the areas of expertise you need for the new matter will yield published articles and commentaries, seminars, speaking engagements and biographies on law firm websites of lawyers with the exact experience you're looking for.

In addition to identifying outside counsel qualified to handle a new matter, you sometimes have the ability to select from among several good options. For a large enough project, a private fund manager might submit written questions to multiple law firms, review sample materials, request references or even hold a "beauty contest" – inviting finalists to make a pitch presentation.

One last point worth noting is that it's sometimes said, "There are those who hire law firms and those who hire lawyers." Real people obviously will be working on your projects, and their experience, expertise, perspective, communications skills, intelligence, creativity, practicality and responsiveness can make the entire difference. It's equally true that law firms themselves have reputations, and the reputation of the law firm can influence the comfort level of investors, counterparties and regulators.

HFLR: How important to the outside counsel selection process are relationships with regulators?

Filler: Not surprisingly, law firms will vary in terms of how close their lawyers are – or any individual lawyer is – with any particular regulatory authority. Being known to have a good relationship with particular regulators is definitely an advantage. It's also true that law firms practicing in a given space broadly enough or for long enough develop those relationships, because it's critical to clients that their lawyers be able to reach out to those regulators, either to obtain guidance or to get the regulator's view on the possible paths for the client to be able to proceed with its business.

HFLR: To what extent do law firms agree to alternative fee arrangements with private fund managers?

Filler: Times have changed in this regard, especially in the period since the financial crisis, with more law firms now willing to consider alternative fee arrangements for work that historically would have been billed on a strict hourly basis. Consequently, a variety of alternative fee arrangements may now be available to private fund manager clients, from a fixed percentage discount on hourly rates; a fee-capped or fixed-fee arrangement; success-based incentives; and of course a combination or hybrid of arrangements. I think it's also true, though, that the willingness of firms to undertake alternative fee arrangements varies widely from firm to firm and may depend upon the amount of business the client generates for the law firm.

HFLR: Do buy-side firms continue to worry about "Lehman risk," and if so, how are they handling it?

Filler: It varies from fund-to-fund, but most are at least thinking about their exposure to the credit risk of their dealer counterparties when they put in place trading and credit agreements, such as ISDAs, MRAs, GMRAs, futures agreements and prime brokerage agreements. More and more, funds are establishing relationships with multiple dealers so that, if necessary, they can transfer positions quickly.

Funds are also using tri-party collateral arrangements and focusing on their contractual rights in the event of dealer insolvency. And even though there's a lot of uncertainty as to how the new dealer insolvency framework will hold up in a distressed scenario, private fund managers are paying close attention to legislative and regulatory developments in this space.

Of course, the flipside of tri-party collateral arrangements is that they introduce the risk that the custodian will fail. Funds are trying to become more knowledgeable about the laws that apply to different types of custodians and how their assets would be treated in the insolvency of a custodian. Even outside the tri-party context, funds want to be able to assess their custodial arrangements and understand the consequences of, for instance, granting the custodian a right of rehypothecation.

[For more on the Lehman Brothers collapse, see "How Can Hedge Funds Get Their Money Out of Lehman Brothers International Europe?" (Aug. 5, 2009).]

HFLR: How will increased capital and liquidity requirements for banks and broker-dealers affect services provided to hedge funds?

Filler: Many hedge funds have already received requests from their trading counterparties to "re-paper" or "novate" services, and we expect this to continue. Increasingly, banks are moving their financing businesses to different legal entities in response to developments such as Basel III, intermediate holding company requirements and liquidity coverage ratio requirements.

For hedge funds, this means reassessing the risk of the particular dealer entity they're trading with and potentially re-evaluating whether the form of transaction being used is still the most efficient way of obtaining financing. For example, regulations imposed on banking entities are making ordinary financing transactions such as repurchase and stock lending facilities or long-term credit facilities much more expensive, and these costs are being passed along by banks to their customers.

Also, some of the new regulations impose greater costs on the world's largest banks, so some hedge funds are also considering trading with smaller banks that may be less capital and liquidity constrained under the new rules, although small banks may pose greater counterparty risk than the biggest banks.

[For additional insight on the impact of Basel III, see "Basel III Raises Prime Brokerage Costs for Hedge Fund Managers" (Feb. 18, 2016).]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Kramer Levin Naftalis & Frankel LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Kramer Levin Naftalis & Frankel LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions