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The relationship between
investors and managers on
fund structuring is evolving all
the time. Ogier’s Justin Savage
examines the implications and
impact of this development.
In this article we address how the landscape for the structuring
of offshore investment funds established in the Cayman Islands
is changing—and how this change is being driven by the evolving
relationship between investors and investment fund managers
and, in particular, how the balance of power has in many cases shifted
from the manager to the investor.
We briefly analyse some of the drivers behind such a shift, some
of the most significant trends that we have seen emerge, and lastly,
how the Cayman Islands as a key jurisdiction for offshore investment
funds has successfully adapted to the increased demands for
flexibility within fund structures.
Market drivers: the balance of power
A combination of diminished returns across the hedge fund industry
amid challenging market conditions for generating alpha and a
continued and increased focus on performance has given rise to a
shift away from more traditional hedge fund products to the more
attractive returns offered by private equity investments.
As a consequence of this shift, some traditional hedge fund investors
moving into the private equity space are bringing along with their capital
an expectation of receiving offering terms that they would be familiar
with from their experience of investing in the hedge fund world.
In addition to the traditional hedge fund investors looking to make
the transition across to private equity offerings, we have also seen a
number of traditional hedge fund managers looking to put in place
private equity styled offerings, or more hybrid structures, in order to
retain or attract capital flows moving in the direction of private equity
chasing better returns.
Such private equity or hybrid-style offerings by traditional hedgefund
managers often reflect many of the characteristics of a more
traditional hedge fund, given the manager’s mixed heritage.
The big allocators are getting even bigger and with an increase in
size comes a consequential increase in bargaining power and the
ability to demand increasingly favourable and bespoke offering terms
from managers. Often this increased bargaining power can lead not
only to specific rights or benefits within an existing fund structure (eg,
by means of a negotiated side letter), but in certain cases the requests
of institutional or strategic investors can lead to managers putting
in place a tailor-made structure with bespoke terms established
specifically to meet the investor’s requirements commonly referred
to as a ‘fund of one’.
In times of challenging returns, there is often increased pressure on
smaller managers to attract capital, as larger investors and allocators
can be attracted by the relatively safe harbour of more tried and
tested managers. In addition to expectations around performance
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