Quarterly Newsletter – Q4 2009
Posted on 31 Dec 2009
Laven Partners acquires ISO 9001:2008 Quality Management Certification
Laven Partners’ accredited due diligence service has received a certificate for the quality of its due diligence processes by the International Organization for Standardization (ISO).
This recognition adds to the unique and well recognised brand in risk management and compliance services Laven Partners already maintains. The firm will be even better placed to serve its institutional client base which needs independent service providers with recognized credentials. This is all the more relevant with the increase of advisors’ liability that has come from poor fund selection as recently evidenced in Switzerland in relation to Madoff.
Jerome Lussan, Founder and CEO of Laven Partners says: “Over the past year, we have seen a huge increase in interest in our due diligence services – for some institutions, the losses resulting from frauds have caused damage to reputation and trust and led to a stronger demand for better risk management.
Investment advisors are required to act with “due diligence” and comply with applicable regulations when managing client accounts. However, in several recent cases this has been called into question as a relatively cursory review of Madoff by due diligence professionals would likely have revealed a number of red flags.
Lussan continues: “Receiving the ISO certification means that our due diligence services follow systems which ensure the highest standards of review and analysis as well as a high level of customer satisfaction. It is not always practical or cost effective for all investors to recruit their own analysts.
Our service addresses the issues that arise when investors cannot sufficiently review funds, monitor risks, or where they require a third party assessment of investments. We believe that the certification will enhance our product further as ISO represents an international consensus on good quality management practices, ultimately benefitting the investors who use our services.”
Laven Partners features in the trade press
INVESTORS GO FOR INDEPENDENT CHECKS ON FUND MANAGERS, FTfm, 13 December
“Operational due diligence is terribly underrated,” says Jerome Lussan of London adviser and consultancy Laven Group. “It’s a lot of work. Yet, it’s difficult for some investors to appreciate how much effort goes into it.”
That is partly because instead of looking at a complete picture of a manager’s operation, most investors have so far based their investment decisions largely on fund performance.
This strategy, as was discovered in late 2008, was a bad way to carry out one’s fiduciary role. The Madoff situation alone, for instance, had already led to scores of legal problems for funds of funds and other plan sponsors.
Laven Partners assists on the launch of new funds
This quarter we were involved in a number of launches for a variety of clients that we helped structure. We obtain FSA approvals and with Laven Legal Services we promptly draft complex prospectuses. Press coverage on some of our recent launches is below.
NEW TREND LAUNCHES US EQUITY HEDGE FUND, The Hedge Fund Journal, 16 November
New Trend Fund Management Ltd is launching its first hedge fund, the New Trend US Equity Fund.
“Investors, such as family offices and funds of funds, are much more afraid now of getting it wrong as evidence builds that there will be liability,” says Mr Lussan.
To read the entire article, please visit the FT at: http://www.ft.com/cms/s/0/3987e37a-e688-11de-98b1-00144feab49a.html.
BREVAN HOWARD SAID TO RESTRICT INVESTOR INFLOWS TO THREE FUNDS, Bloomberg, 7 December
Brevan Howard Asset Management LLP, Europe’s largest hedge-fund firm, limited the flow of money into three funds as client assets approached last year’s high, according to people familiar with matter.
“It’s a good sign that people who were sitting on their hands and waiting for things to happen are acting, writing checks and investing again,” said Jerome Lussan, founder of hedge-fund consultants Laven Partners in London. “As they go back to hedge funds, people are going back to the most recognizable and comfortable names because they can’t afford to make mistakes again.”
To read the entire article, please visit Bloomberg at:
Laven Partners Ltd, the London based investment management consultancy, advised on the fund and management company’s incorporation, prospectus and CIMA registration in the Cayman Islands as well as on the incorporation of the fund’s Swiss investment advisor, New Trend Capital Partners Ltd. Laven Legal Services Ltd, the associated law firm of Laven Partners Ltd, provided assistance with legal implementation and documentation.
Jerome Lussan, said: “Liquidity is a high priority for today’s investors; the fund will seek to invest in highly liquid underlying investments to ensure it can match investors’ requirements. The fund also meets the demand for transparent fund structures, with an external auditor and administrator in place to ensure added security for investors. These structural benefits combined with Steven and Marc’s knowledge and experience, particularly in US equities, should appeal to investors focused on long-term returns.”
To read the entire article, please visit the THFJ at: http://www.thehedgefundjournal.com/news/2009/11/16/new-trend-launches-us-equity-hedge-fund.php.
MOLINERO CAPITAL MANAGEMENT LAUNCHES SYSTEMATIC CTA FUND, Hedge Funds Review, 27 October
Hedge fund manager Molinero Capital Management has opened its first independent hedge fund, Molinero Global Markets Fund, a systematic CTA.
Laven Partners Ltd advised on the incorporation of the fund in the Cayman Islands and its registration with the local authorities while Laven Legal Services Ltd provided legal assistance for the fund and on its offering memorandum.
The fund aims to produce consistent above average returns through long- and short-term investments in the global futures markets using a proprietary trading program. It will seek to mitigate risk through diversification of investments and hedging activities.
To read the entire article, please visit Hedge Funds Review at: http://www.hedgefundsreview.com/hedge-funds-review/news/1559945/molinero-capital-management-launches-systematic-cta-fund.
NEW CREDIT FUND LAUNCHES WITH A PIONEERING NAV METHOD
Northlight European Fundamental Credit Fund is a European-focused hedge fund established in the Cayman Islands to invest in credit-oriented securities, such as secured and unsecured loans and bonds. The fund launched in December.
The fund will invest substantially all of its capital through a “master-feeder” structure in a master fund, which is also domiciled in the Cayman Islands. The fund is managed by NorthLight GCI in the Cayman Islands and advised by Limestone Advisors Ltd in the UK.
Laven Legal Services Ltd worked with its associated firm, Laven Partners Ltd, in the structuring of the fund. An important aspect of the structuring included working closely with the management team in developing an innovative ’3 way’ (bid, mid, offer) net asset valuation method.
New FSA Rules and Reporting Requirement: Liquidity Management
As part of our continuing regulatory expertise we provide regular comments on important new regulatory developments. This quarter we note the new liquidity requirements.
On 1 December 2009 the FSA’s new rules on liquidity management came into force. The rules were introduced to toughen up the existing provisions on liquidity risk management. The FSA is applying the lessons it has learned during the past two years when several large credit institutions faced an acute liquidity crisis.
Whilst banks are encouraged to lend more and provide the market with more liquidity, the FSA maintains that at the other end of the spectrum, liquidity management standards must be significantly improved. By strengthening the liquidity rules, the FSA hopes that it will help improve the perception of the financial soundness of UK financial institutions. The long-term aim is to make the UK financial sector more competitive.
Laven Partners has already assisted several credit institutions abroad to meet similar liquidity requirements which have been based on the Principles for Sound Liquidity Management issued by the Basel Committee on Banking Supervision. The new rules are also partly based on these principles which effectively create a global standard being applied across jurisdictions.
Asset Managers and Investment Advisers
The new rules are applicable to all BIPRU firms, including investment firms such as asset managers and investment advisers. However, asset managers and investment advisers are likely to be excluded from the full scope of the rules as they would usually fall within a BIPRU limited licence or limited activity category.
What do the new rules cover?
The requirement to have adequate liquidity risk management policies and processes in place already exists under the FSA’s rules in the Senior Management Arrangements, Systems and Controls sourcebook (SYSC 11). The new rules will be contained in the Prudential Sourcebook for Banks, Building Societies and Investment Firms of the FSA handbook (BIPRU 12).
The new liquidity rules introduce more detailed requirements in terms of pricing liquidity risk, intraday management, collateral, liquidity needs of various business lines and funding diversification.
Whilst a requirement to conduct stress testing already exists under the requirements in SYSC, the FSA have provided specific scenarios for firms to test. Additionally, firms will be required to report to the FSA on the effectiveness of their systems and controls requirements.
Firms subject to the rules need to take steps now to prepare for the introduction of the new requirements.
If you require any further information or advice on the application of the rules please contact your compliance consultant at Laven Partners.
Overseas companies under increasing scrutiny by HMRC
On 11 August 2009, a first-tier tribunal ruled that Laerstate BV, a Dutch company resident in the Netherlands, had its central management and control (“CMC”) in the UK and therefore the company would be liable to UK tax. The decision was recently published.
Laven Legal Services, experts in structuring hedge funds and management companies, believe this case will be pertinent for many investment management professionals whose funds and management companies are in off-shore jurisdictions. This is particularly true for those on the board of directors of offshore companies while resident in the UK.
Jerome Lussan, Founder and CEO, Laven Legal Services, comments:
“The court accepted HMRC’s arguments and found that the CMC of the company was exercised in the UK.
This is a recent ‘win’ for HMRC and arguably armed with this decision they will focus with greater intensity on non-resident companies which have some UK operations but which lack adequate processes and substance offshore. This could impact a significant number of players in the investment management industry.”
“HMRC accepted the argument that where a company is run through board meetings, the place of CMC is likely to be where the board meets. On the facts of this case however, HMRC proposed and the court agreed that the company was not run in this way even though none of the board meetings were held in the UK, nor were any of the documents signed in the UK.
It is imperative for board meetings to be conducted outside the UK and for these meetings to be a proper forum for discussion. Simply rubber stamping pre-defined decisions will not be acceptable in the eyes of HMRC. It is also important to maintain the correct balance of non-UK directors.”
Lussan continues: “This decision shows HMRC’s willingness to pursue cases of this nature and the courts’ likeliness to find in HMRC’s favour. It is yet to be seen whether this decision will stand in higher courts, however it is important for investment professionals to take points of good governance from this case and most interestingly the court’s review of evidence will inspire many to review ‘bad habits’.”
For further information on the case, please see our memorandum on Laven Legal Services’ website at: http://www.lavenlegal.com.
Laven Partners supports Hedge Funds Care UK
On 3 December, Laven Partners attended the fifth annual UK fundraising event by Hedge Funds Care UK, the UK charity of hedge fund industry professionals committed to protecting children from abuse and neglect. The event featured a Christmas theme filled with music and entertainment and was attended by hundreds of hedge fund industry professionals. The evening raised almost £200,000 to benefit charities that work towards the prevention and treatment of child abuse.
Jerome Lussan said: “This is the third year running that we are supporting Hedge Funds Care UK and it is an honour to be part of such a worthwhile charity – the cause is very close to our hearts.
Laven Partners continues to provide an update on the AIFM Directive
In December we sent out our sixth monitoring update on the proposed AIFM Directive. Since the release of the amended AIFM Directive by the Swedish Presidency, another revision has emerged. Jean-Paul Gauzès, Rapporteur for the European Parliament’s Committee on Economic and Monetary Affairs, has produced a report which proposes numerous changes to the Directive. These amendments have been received with mixed reaction by the industry following several months of intense campaigning.
However, despite the more realistic regulatory approach adopted by some decision-makers in the EU, some funds are nevertheless taking precautions by considering moving from their originally established jurisdictions. For example, we have been speaking with a number of funds considering re-domiciliation from the Cayman Islands and moving on-shore to the US or Luxembourg in an attempt to bring funds under what is perceived as a stronger regulatory framework. Many that aren’t, are at a minimum considering establishing on-shore parallel structures to take advantage of changing investor sentiment or perceived market opportunity.
The EU Select Committee of the House of Lords also wrote to Lord Myners, the Financial Services Secretary to HM Treasury, addressing their concerns over the Directive. Interestingly, the House of Lords raised the issue that the Directive in its current format would bring about an unnecessary level of protection to well-informed institutional investors and banks. It was also recommended that the Directive complement global arrangements.
Laven Partners joined in on the discussions with MEPs this month. We heard that because of the extent of anti-British sentiment on the continent, non-British contacts should be utilised to lobby points on behalf of UK representatives. We were also told that UK politicians are wary of making a stand for the UK and the financial industry because of fear of being seen as funded by or representing the hedge funds or banks.
Following months of campaigning, the Directive finally seems to have gathered some positive momentum with some reasonable amendments being introduced and an awareness that should help drive a better result. Even though one EU negotiator said it would be unlikely that member states will be in agreement on the Directive before the Spanish presidency takes over in January, we have heard that the Swedes are briefing the Spanish in advance of January and there are even rumours of a new Spanish text by the end of that month. Before then, the Swedes have promised a progress report on the Directive.
In terms of the legislative process, we understand that the objective is for Parliament to vote on the final text of the Directive by July 2010, with 3 years expected for implementation by 2013.