It’s not like me to be quite a salesman for anything, but I thought I would give my views regarding the HFBOA conference and why I believe it will be beneficial to hedge funds CFOs such as myself.
In quick review, here are the topics of the conference:
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Regulatory updates: At home and abroad
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Regulation at the state level: New implications for private fund managers
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The future of offshore jurisdictions
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what you need to know about the European Alternative Investment Fund Managers Directive
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Accounting, auditing and tax updates
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Managing your third party relationships more effectively
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financial management for the fund and fund advisor
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Managing investor relationships: From due diligence to fundraising
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How do investors' approaches to due diligence differ? Investor Panel Discussion!
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terms, liquidity, and fundraising: A look at varying expectations
Given the market environment these days, I am always facing different questions and I believe this year is one in which going to the conference will be of most value.
I am very concerned about the EU directives because my fund is primarily invested in western Europe. Of particular interest is short bans by country: There is going to be much more compliance required in certain countries (which will require monitoring position size on shorts to say the least) and I am curious what the panelists will say are "more likely than not" to stick once the books are written.
As far as the new carried interest law, we are generally a short term capital gain shop, but everyone wants to be able to get as much capital gain vs ordinary, especially since the elimination of all those offshore deferral compensation plans that were so popular a few years back. The combination of the new carried interest law and the elimination of the Bush tax cuts (or what looks to be possibly amendments with Obama’s stamp, but again favoring tax treatment away from the hedge fund managers) should make for some interesting discussions, both at the conference and going forward in the months before 2011: How managers will operate as tax-efficiently as possible. Are we going to need to accelerate capital gains to take advantage of lower tax rates? What will happen with all these dividends that were getting preferential treatment that will no longer apply? Are swaps still going to get around all that offshore withholding?
The pendulum for prime broker agreements are swinging more in favor of the managers again. The collapse of the world back in 2008 (when I launched our fund) dictated that funds needed to take on multiple prime brokers as well as a cash custody account for free cash. That put hedge funds at the mercy of the brokers and banks and terms for hedge funds were very unfavorable. I think now is the time to really push back and renegotiate agreements and possibly eliminate the need for four or more prime brokers and discuss terms that favor funds a bit more. I think this particular conference session will provide significant value to hedge fund manager CFOs, though will probably benefit all attendees to some degree. Another key question: What will administrator’s agree to in their new agreements for 2011 and beyond? Can we as an industry apply enough pressure to renegotiate what is currently in place regarding price verification? Can we get them to agree to pricing the portfolio vs. a price verifier? I would love to hear what my peers think.
As for income and expenses of the funds moving into next year, what will the trends be to the following?
1. High water marks-what will we as an industry be expected to make before we collect our 20% (if it stays there)
2. What is going to be the industry standard for management fees-i.e. is 2% acceptable anymore?
3. What about expenses that funds feel comfortable charging to the fund, given a downward trend away from the 2%? IF we charge less to the funds can we stay at 2% or if we go to say a 1% benchmark will investors "expect" to pay for more and have the manager pay for less? OR is there such a paradigm shift that will require into 2011 and beyond (dare I say) 1% fees and also very little fund expenses?
4. As to liquidity terms, we are looking to see what PPMs will look like going forward-what will investors "expect" to be given in addition to fee terms, specifically liquidity? At our fund, we have bounced that around a lot recently to figure out whether you can have a hard lock, just a soft lock, some combination of lock or (if the fund is liquid enough) really not have any lock up at all? I am curious where investors stand on this as they need to appreciate that managers are looking for long term partnering relationships. Although it’s important to give on some liquidity, especially if the fund is liquid, we don’t want to be managing our fund quarter to quarter or month to month if it ever gets to that point.
These final areas of the conference I think will really leave people with some thoughts to consider.
Again, not being a salesman, I nonetheless hope I sold everyone on the need to attend and get ready for a very exciting few days. Attendance has grown year over year and I think this is the perfect time to join your peers for what I feel are strong sessions on key issues as we head into next year. See you there.
Marc Abel, Chief Financial Officer, Dabroes Management LP
Executive Board Member, HFBOA
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