Practitioners who represent hedge funds coordinate multiple legal disciplines in order to counsel sponsors and investors concerning all aspects of hedge fund operations and investments. As hedge funds themselves come in a variety of sizes with diverse aims and goals, the exact mix of legal skills required varies from fund to fund. For instance, funds that focus on investing in distressed entities might require more specialized legal counsel in area of restructuring. By and large, however, most funds will require specialized legal counsel in the areas of fund formation, investment transactions, tax law, and securities regulation.
The fund formation aspects of advising hedge funds include how funds are structured and documented, often with an eye toward facilitating the fundraising function. Specific tasks include preparing partnership agreements between the general partner and investors, establishing how the general partner of the fund will be compensated, and preparing the fund’s offering materials.
The investment objectives of hedge funds vary a great deal; therefore, the degree of sophistication they require in executing transactions can vary. While there are a large number of hedge funds that primarily are focused on liquid trading strategies, many hedge funds make illiquid investments, including participating in large, complex leveraged buy-outs or take-private transactions, PIPE transactions, and activist investing.
Hedge funds operating in the U.S. are subject to the full spectrum of securities disclosure and compliance rules and regulations. Regulation of hedge funds has also recently undergone a major overhaul with the passage of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, which places new or heightened regulations on hedge funds.
Hedge funds have long been cauldrons of financial innovation, and practitioners advising hedge funds by necessity must be capable of addressing the legal and regulatory issues that impact hedge funds in what can be a quickly evolving business and legal landscape.