Let’s be clear about what you’re getting from when you hire a hedge fund attorney: somebody to write your offering memo. Other miscellaneous legal matters always come up, but that’s basically it. It’s boilerplate stuff.
Lawyers “play a somewhat lesser role than some of the other key service providers in the success of the hedge fund on a go-forward basis once the documents are complete,” says Douglas Carpenter, partner in hedge fund advisor and administrator Strategic Asset Management. In Carpenter’s experience, offering memos and other hedge fund-related legalese has become increasingly standardized. “Price is dictated by reputation. Have realistic expectations, or you’ll be overpaying for documents.”
Legal services to produce the same offering memo can vary dramatically from the bottom to the top of the attorney food chain so, apparently, reputation is important to somebody. As you go about marketing a hedge fund, the relative importance of your counsel’s reputation should exactly match those of your investors.
Sophisticated investors might require a higher-profile attorney but, according to Carpenter, “if you’re selling to friends and family, you don’t have to pay $50,000 to $100,000 more.”
“You should hire a large firm or a high-priced attorney if institutional seed investors require it, or in other very technical, very specialized situations,” one West Coast investment management attorney agrees. “Otherwise, the need is just not there.”
Those technical, specialized situations refer mainly to the other primary driver of selecting a lawyer to help you with starting a hedge fund: strategy.
“For a generic long-short equity fund, it’s is not a big deal,” Carpenter says. Still, it could be an enormous deal for more esoteric strategies. He singled out life settlements, in which the life insurance policies of terminally ill people are discounted and securitized, as the sort of instrument that, if it’s within your fund’s strategy, can’t be represented by some lawyer at the top of a Google search.
“I’ve had attorneys turn that one down,” Carpenter said.
Which makes it unusual. Otherwise, “there’s an attorney for everything,” Carpenter says. “You’ll pay for this, of course, but a larger law firm will be able to provide any [strategy-specific] service.”
If you’re dealing with strategies that aren’t run-of-the-mill you “should make sure the attorney has worked on a project like that before,” according to the West Coast attorney, who professes personal experience in futures and commodities.
“If you invest in tax liens, it’s better if an attorney knows what a tax lien is and has set up a few funds like that,” says Hannah Terhune, a Jackson, Wyoming-based hedge fund attorney and managing partner in Capital Management Services Group.
As critical as it is to select the right lawyer when starting a hedge fund, it’s just as critical to not hire the wrong one. Spotting the problematic attorney, though, can be difficult, especially for the inexperienced manager.
“Most people setting up a fund never hired a lawyer before, so it’s a new purchase for them,” Terhune observes. Her first piece of advice is to “not just ask for references — talk to references.”
That advice is hard to disagree with, but Carpenter adds that references should be current and reflect an ongoing commitment to the hedge fund industry. All sources are in consonance that chemistry with your potential counsel is important, because this isn’t just a transaction you’re entering into; it’s a relationship. You need to know this professional is going to pick up the phone when you — or your investors — call. If the hedge fund lawyer has his or her own connections to the investment community, so much the better. That the lawyer understand the registration requirements and other regulations specific to the particular states in which you’re doing business goes without saying.
Carpenter also brings up the topic of ethics, and cautions against lawyers who advice shortcuts or end-runs around the law. He cites the hypothetical example of a lawyer who might tell a Colorado-domiciled hedge fund manager that he can get around the Centennial State’s rule that cash movement requires a second signature by opening up a post office box in another state.
Ultimately, though, hiring an attorney is much like any other process in the business of starting and marketing a hedge fund: It all comes down to research.
“Get some evidence to back up whatever you’re told by the attorney,” Terhune says. “Some are big on schmoozing, but not big on deliverables.”