Alston & Bird was recently named a “Hedge Fund Law Firm” by Hedge Fund Alert for the third consecutive year and singled out by CTA Intelligence as the top firm for client service to the investment funds industry. We sat down with Tim Selby, head of the firm’s Investment Management Practice and president of the New York Hedge Fund Roundtable, to discuss industry challenges and trends for the remainder of 2015, in addition to recent firm accolades.
What do you think the biggest challenge for hedge funds is going to be for the rest of 2015?
For this year, and in the years to come, the cost of building an institutional infrastructure and complying with the heightened level of regulation will challenge hedge fund managers. Today, managers are faced with expectations from institutional investors and regulators to have a substantial infrastructure in place and demonstrate an ability to comply with all of the regulatory obligations that are now imposed upon them.
Over the last six months, investors have redeemed $34.6 billion from hedge funds, according to BarclayHedge and TrimTabs Investment Research, the largest consecutive quarterly outflow since 2009. Do you think this trend will continue?
No. The redemptions are, in part, the result of frustrations by investors when they compare the returns of hedge funds against the broader equities market. We are in a bull market cycle, and memories of 2008 and 2009 have begun to fade. Hedge funds, at their core, are meant to be capital preservation and risk mitigation vehicles. Meaning, hedge funds prove their worth in more volatile and down markets. The hedging techniques employed by many managers are meant to safeguard assets against adverse market movement. So the fact that hedge funds as a class underperform a broader market that is in a bull cycle is not surprising. When market trends reverse or at least become disrupted, the techniques that hedge fund managers employ should prove to be more appreciated and, hence, become more popular.
You serve as president of the New York Hedge Fund Roundtable. How does the organization bring investors, investment managers and other industry professionals together and for what purpose?
The New York Hedge Fund Roundtable is unlike any other industry organization. It is a nonpartisan group that meets on a monthly basis for the purpose of enhancing the level of understanding about the hedge fund industry to all in attendance. It is also a group that promotes an expectation that all industry participants exhibit high ethical standards and employ industry best practices in their professional lives. Regular attendees appreciate that taken together, the monthly events enhance their knowledge about how the industry functions and the challenges being faced. Attendees also have the opportunity to participate in the monthly discussion through an interactive Q&A session as well as contribute to the industry surveys that are conducted each month. The atmosphere created by the Roundtable is very collegial and provides an excellent forum for networking and professional development.
With the impact of Dodd-Frank and continuing regulation of hedge funds in general, do you think the recent trend for hedge funds moving to family offices will continue?
For those managers who have achieved significant financial independence, yes. The level of regulation and heightened level of exposure has forced many successful managers to consider returning investor capital in favor of managing their own money. There will, however, always be new entrants looking to start their own alternative investment funds.
How do the continuing cybersecurity threats impact hedge funds?
Cybersecurity is impacting everyone, not just the hedge fund industry. It is a constant threat for any business and it is of particular concern when analyzed in an environment where investors have financial assets that are exposed to cyber threats. Cyber criminals are getting more sophisticated. As a result, hedge fund managers are expected to have robust systems in place to safeguard assets. Given the constantly evolving nature of cybercrimes, it is incumbent upon hedge fund managers to assure investors that they have appropriate systems in place to combat cyber threats. Most hedge fund managers do not have custody of client assets, which are held on deposit with well-capitalized financial institutions with robust cybersecurity departments. Hedge fund managers are most at risk to attacks on data and trading system methodologies.
What do you believe is the most attractive benefit of alternative investments to retail investors?
Having access to hedging techniques that allow them to better safeguard their investment portfolio. In order to do this effectively, investors must be vigilant in their education and understand that not all hedging techniques are appropriate. Investors should work with trusted advisors who can counsel and recommend hedging techniques and strategies that are suitable to their individual needs.
Hedge Fund Alert listed Alston & Bird as a “Hedge Fund Law Firm” for the third consecutive year, and CTA Intelligence awarded the firm “Best Law Firm – Client Service.” What do you attribute these successes to?
The investment funds industry has experienced significant change in recent years with increased regulation and a fluctuating economy. Our team has succeeded in following the market closely and providing comprehensive advice to our clients. Working with clients is a passion everyone in our group is committed to. As an illustration, most of the attorneys in our practice, as well as several other practices throughout the firm, have taken and passed the Claritas exam, which is a financial industry examination administered by the CFA Institute. I am not aware of a single law firm that has undertaken this level of commitment to demonstrate to our clients that we are focused on truly understanding their business.