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Experts Discuss Hedge Fund Market Volatility

by Phillip Morton, Investors, London

12 December 2008

Global offshore law firm Walkers recently brought together top financial industry leaders and more than 200 attendees in New York to discuss the volatile hedge fund market and provide insights on distressed funds.

Joining Walkers for the "Fighting the Tape" seminar were investment manager George Hall, founder and president of The Clinton Group; Professor Jeffrey Rosensweig, director of the Global Perspectives Program at Goizueta Business School at Emory University; and Yolanda McCoy, head of the Investments and Securities Division at the Cayman Islands Monetary Authority (CIMA).

The wide variety of speakers offered a comprehensive look at the changes in the market over the past year, as well as predictions for what the alternative investment funds industry can expect in the months ahead. The experts' predictions included an anticipated new era of hedge fund regulation, greater flexibility and versatility in hedge fund offering documents, broader discretion for fund managers, and continued growth in many of the world's key economies such as China, India, Russia, Brazil, the Middle East, and South Korea.

Among the first speakers, Walkers partners Roger and Ingrid Pierce examined the manager's perspective with regard to distressed hedge funds. With so many attendees from the asset management community dealing with issues related to significant redemption requests and illiquidity, this presentation became a focal point of the seminar. Mr. Rogers and Ms. Pierce outlined an innovative solution that Walkers has developed with US counsel to create the effect of a side pocket where an express side pocket mechanism did not exist. Involving the formation of a Cayman Islands company and the distribution of its shares to pay out redemptions from the fund in kind, this 'synthetic side pocket' solution attracted significant interest from attendees.

"The principal advantage of the 'synthetic side pocket' is that it relies on the use of mechanics that are permitted by and disclosed to investors in the fund's offering documents," Mr. Rogers explained.

Mr. Hall gave his personal views on the financial crisis and what the market might see under President-elect Barack Obama. While he felt it was too early to say how the "Obama factor" might influence the hedge fund industry, Mr. Hall said that he hoped the new President would make good choices when selecting his Treasury Secretary and a leader for the SEC. The government's initial offer to purchase "toxic assets" through the 'Troubled Asset Relief Program' (TARP) was not presented very well, according to Mr. Hall, who said there is no such thing as a toxic asset, only a toxic price.

As a Cayman regulator, Ms. McCoy provided an update on the impact the financial crisis has had on the Cayman Islands hedge funds industry. According to CIMA, the total number of hedge fund registrations in the Cayman Islands are still running ahead of the same period in 2007 with 1,441 new authorisations up until September 2008 compared with 1,407 during the same period in 2007. During the month of October, there were 85 new fund authorisations processed with an additional 25 pending.

"The true impact of the US credit crisis will not be tangible for many months to come," Ms. McCoy said, although she was able to confirm that to date they were aware of a total of 340 Cayman funds that had been impacted by the problems with Lehman Brothers, Merrill Lynch, and AIG, with more than 200 of those affected by issues with Lehman. Fund terminations are still "extremely low," running at an average of 50 per month, Ms. McCoy added. "While we expect terminations to rise, the current situation will not paralyse the Cayman fund industry," she said.

Guy Locke, senior partner of Walkers' Insolvency Group, and Scott Lennon, senior vice president at Walkers Fund Services, looked at distressed funds from their perspectives. Mr. Locke discussed some of the issues – and opportunities – related to insolvency, while Mr. Lennon spoke from his position as independent director to investment funds.

"When a fund is in distress, the investors take comfort in knowing that the Board of Directors is comprised of persons with the requisite background and experience to deal with the crisis," Mr. Lennon said.

Professor Rosensweig closed the seminar with insights into the investment opportunities presented by this current stage in the cycle, shifting the focus from New York and London to emerging markets such as Brazil, Russia, China, the Middle East and India as the next growth engine for the global and US economy in terms of jobs, capital, and other areas.

"The world adds 100 people every 42 seconds," Professor Rosensweig said, "and 98% of that population growth is in the emerging markets." Pointing to the expectation of long-term continued economic expansion in these regions,

Professor Rosensweig said this massive population growth, combined with a move out of poverty in these regions, presents real future opportunities for investors. Professor Rosensweig also suggested that President-elect Obama should utilise direct spending to boost jobs and the US economy, which foreshadowed Obama's recent commitment to create 2.5 million jobs by 2011.

"Spending money to overhaul the subway system in New York will be better than any tax rebates," Professor Rosensweig said, adding that he doesn't anticipate anything close to a depression for the US but does see a very slow recovery from the current recession.

Mark Lewis, senior investment funds partner at Walkers, who opened the seminar said: "we received a great response from the major law firms who were keen to find out more about the innovative solutions to hedge fund problems that we are facing on a daily basis with distressed hedge funds."

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