2006 Alpha Awards - The Law Firms

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In June a partner with Chicago-based law firm Sidley Austin testified before the Senate Judiciary Committee on the subject of hedge funds and short selling. Earlier in the year another Sidley Austin lawyer was in a New York bankruptcy court on behalf of his client, Rogers Raw Materials Fund, fighting to extract $362 million in unsecured assets trapped as a result of the collapse of futures brokerage Refco. This summer partners at San Francisco law firm Shartsis Friese penned letters to the U.S. Securities and Exchange Commission asking the agency to clarify its position on hedge fund regulation, after the U.S. Court of Appeals for the District of Columbia Circuit overturned hedge fund registration.

The work of a hedge fund attorney has changed dramatically during the past two decades. John Broadhurst, who joined Shartsis Friese in 1978 and helped set up its hedge fund practice, says in the early days legal advice was mostly limited to fund formation. Today, he estimates that only 15 percent of his firm’s business involves startups.

“As the industry has grown and managers have expanded into new strategies, the legal services they need have become more labor-intensive,” says Broadhurst. Michael Schmidtberger, a partner with Sidley Austin, agrees. “We do our share of start-ups, but a lot of what we do is related to the day-to-day operations of hedge funds,” he says.

Sidley Austin and Shartsis Friese are first and second, respectively, among onshore law firms in this year’s Alpha Awardsª ranking of the top hedge fund service providers. They edge out last year’s top overall law firm, Seward & Kissel, in what was the closest voting among all the categories polled. No. 3 Seward & Kissel, which is renowned for having helped Alfred Winslow Jones set up the first hedge fund partnership, in 1949, is probably second only to No. 8 Schulte Roth & Zabel in terms of the number of hedge fund clients it serves.

Top-ranked Sidley Austin takes a broad approach to advising hedge funds. Since its 2001 merger with New York–

based Brown & Wood, Sidley Austin has had a large public fund practice. The firm’s 70-lawyer investment services group works with mutual funds, commodity trading advisers, real estate investment trusts and private equity firms, in addition to hedge funds.

Sidley Austin receives outstanding marks from clients when it comes to regulatory and compliance issues, enabling the firm to edge out Shartsis Friese for the overall prize despite the latter’s No. 1 finish in client service, document preparation and hedge fund expertise.

New York–based partner Schmidtberger, who is co-head of Sidley Austin’s hedge fund practice with William Kerr in Chicago, says his firm has been actively keeping clients up to date on SEC registration. “The biggest factor influencing the hedge fund business during the past 18 months has been the SEC registration rule,” he says. Like many law firms, Sidley Austin helped clients meet the February 2006 deadline for SEC registration and, now that the rule has been overturned, is advising them on whether to stay registered. “I think a fair number of hedge fund advisers will elect to remain registered to be more attractive to institutional investors,” says Schmidtberger.

No. 2 Shartsis Friese is one of several small law firms that stand out for their hedge fund business. Despite having just 53 lawyers, including 13 in its hedge fund practice, Shartsis Friese is the West Coast’s equivalent of market share leaders Seward & Kissel and Schulte Roth in the East, representing more than half the hedge funds in California, estimates partner Broadhurst. He says smaller shops like his were willing to work with hedge funds early, when big firms ignored them because they didn’t generate enough fees.

“The work tended to be a lot of fund formation and regulatory compliance,” Broadhurst explains. “A huge law firm wasn’t interested in a $50,000 one-off project. They wanted clients that were doing $50,000 a month.”

As hedge funds have started needing more services — from advice with activism strategies to assistance with SEC registration to private equity transactions or succession issues — the business has become increasingly lucrative and spawned greater competition. Even huge global corporate law firms such as Skadden, Arps, Slate, Meagher & Flom, which has more than 1,750 attorneys, now have hedge fund practices. Although Skadden Arps doesn’t have the minimum number of client votes necessary to appear in our overall onshore law firm ranking, it is No. 4 among voters in the Hedge Fund 100, our list of the 100 biggest hedge fund firms in the world (see box, page 38).

Schulte Roth’s drop from No. 4 last year to No. 8 in the overall ranking may be in part a reflection of its success. The firm represents more than 1,500 hedge fund, private equity fund and offshore fund clients. “They are often extremely busy,” says Nancy Havens, founder and principal of Havens Advisors, a $220 million, New York–based, event-driven and merger-arbitrage hedge fund. Still, she adds that Schulte Roth has impressed her: “They always give me good advice; they have such vast experience.”

This year we asked managers to separately rate offshore law firms, whose work still largely consists of fund formation or windups. When a hedge fund manager sets up a fund offshore — for tax and other purposes — its legal representative has to be licensed, and is typically domiciled, in that jurisdiction. About 70 percent of offshore hedge funds are registered in the Cayman Islands, according to its local lawyers and regulators.

“The offshore framework works because it balances the needs of investors with those of the promoter and key service providers, the investment manager, administrator and auditor,” says Gary Linford, head of the investment and securities division of the Cayman Islands Monetary Authority.

Ogier wins the Alpha Award for top offshore law firm in a tight race with No. 2 Maples and Calder, which was No. 5 overall last year when onshore and offshore firms were ranked together. (Ogier didn’t meet the minimum vote count to be ranked last year.) Both firms’ hedge fund practices are headquartered on Grand Cayman Island. Maples finishes ahead of Ogier in client service and document preparation, two offshore law firm staples. But what clients most value from their legal counsel — both onshore and offshore — is hedge fund and regulatory expertise, and here Ogier excels.

The story among offshore hedge fund law practices in recent years has been consolidation, starting in February 2004 when Jersey-based Ogier & Le Masurier merged with Cayman firm Boxalls. That acquisition set off a flurry of deals as firms rushed to gain practices in offshore hedge fund hubs such as Ireland, Bermuda and the British Virgin Islands.

“The demand, particularly from institutional clients, is for multiple jurisdictions, and they want a law firm that can represent them in multiple places,” says Grant Stein, global managing partner with Cayman-based Walkers, No. 3 in our offshore firms ranking.

The acquisition activity has created a “magic circle” of firms with specialist hedge fund practices, largely dominated by outfits headquartered in the Caymans, whose legal system, like those of most other offshore jurisdictions, is modeled on British law. In addition to legal advice, many offshore law firms offer administrative services and other functions, such as providing independent fund directors.

“The reason Cayman has been stretching out in front of its competitors is because Cayman law firms have been so competitive with each other,” says James Bergstrom, who jointly heads the hedge fund practice at Ogier with Peter Cockhill.