Are costs going to change over the medium and long term? Is cost a factor in a hedge fund’s choice of legal firm? Is there any real cost difference between law firms with a global reach and those with only a few offices?

The financial crisis, frauds, increased regulation and oversight coupled with demand from investors for tighter control will all contribute to legal costs in future, believe the majority of law firms. However, those who have a global reach may be in a better position to advise and guide funds, particularly those operating in multiple jurisdictions.

Brian McDermott and Siobhán Moloney at A&L Goodbody in Dublin say the downward pressure on the fees being charged by hedge fund managers may in turn lead to a greater focus on legal fees. In their experience, cost is always a consideration in terms of choice of firm, although clients are happy to pay for a “job well done”.

Dermot Deering at Hassans in Gibraltar believes law firms and jurisdictions in general need to remain competitive. “Access to human talent is an important factor in this regard. Generally, there is a perception that global law firms are more expensive but that this is justified in the circumstances of a deal,” he says.

Nora Bullock and Simon Atiyah at Lovells in London agree hedge funds are likely to face “significantly increased legal and compliance costs due to increasing regulation”. They point to the EU’s alternative investment fund managers directive and similar US requirements. In addition they believe increased investor disputes and due diligence and disclosure requirements are also likely to increase costs.

Gray Smith at Appleby in Cayman Islands agrees that costs are likely to increase as “there will simply be more for the lawyers to do. Once a law firm is on the ‘list’ it then becomes somewhat price sensitive, but, certainly on the hedge fund side, there are relatively few firms which are regarded as satisfactory to have in an offering document, and hence able to pitch.”

At Brown Rudnick in London, Sonya Van de Graaff says hedge funds are always concerned about value for money, agreeing with Lovells that the bottom line is now a more sensitive issue. “Hedge funds are also in more pressing need of expert and prompt advice in some areas of their operations. In these areas fees are just one factor in the mix of their choice of firms,” she says.

Conyers Dill & Pearman’s Robert Briant in the British Virgin Islands agrees cost will always be a factor in a hedge fund’s choice of law firm.

“A hedge fund which does not retain proper legal counsel will likely be less attractive to investors and more likely run afoul of regulations,” he states. “While costs will always be a factor and will likely rise, it is a cost which must be incurred. If proper counsel is retained they will add value to the overall product.” 

Simon Firth at Kaye Scholer in London agrees with Lovells that costs for commoditised plain vanilla funds will reduce but costs for investment-related work and day-to-day issues such as regulation fees are likely to remain at current levels. “As hedge fund managers diversify and grow and especially when they bring in their own in-house lawyers, external law firms can expect greater scrutiny of their fees and possibly hourly rate discounting. It is possible that law firm panels may, as with banks, for example, be set up by hedge fund managers,” he says.

“Our experience this year with start-ups is that more than ever fees are the key to being instructed,” states Firth.

Henry Smith at the Cayman Islands practice of Maples and Calder agrees with others that clients are cost-sensitive at present and lawyers need to respond to this by pricing services at a competitive level.

“One of the visible impacts of the global financial crisis is that it has separated the wheat from the chaff in terms of legal services and the ability of law firms to step up when it really matters. Clients understand the importance of quality of advice and levels of experience and responsiveness when urgent advice is required at a time of crisis in the life of a hedge fund,” concludes Smith.

Mitch Nichter at the New York practice of Paul Hastings also expects legal costs to rise over the medium and long term as the regulatory, investment and operational environments in which funds and managers must compete continue to become more complex and diverse. 

At Seward & Kissel in New York, Steven Nadel says costs at law firms may increase slightly just to keep up with inflation. “Generally, larger funds are less cost-sensitive than smaller launches but it can be a factor sometimes.”

Ron Geffner at Sadis & Goldberg in New York believes organisational costs could be a material factor for many principals launching an initial fund with no prior operational experience and with little regard for ongoing expenses after the launch. “Managers which enjoy strong reputational background seem less concerned with cost and more concerned with the firm’s reputation,” he notes. 

John Langan at Withers in London says cost is a major driver in choice of law firm but does concede that reputation and expertise, particularly in specialist areas of legal services, is also important. Those with experience of establishing funds do recognise that it can be worth choosing a more expensive firm if this gives them confidence that the fund will be established efficiently and will be well structured, he says.

Jonathan Tonge at Walkers in the Cayman Islands agrees. “Cost is always a factor. Increasingly, clients are looking for full service and full global support,” he says.

Joey Garcia at Isolas in Gibraltar echoes other lawyers. He believes with fewer people willing to invest during a recession, the costs involved in the fund industry may have been temporarily reduced since law firms, for example, have been more willing to reduce the legal fees to funds for the sake of securing their business.

In Malta, Frank Chetcuti Dimech at CDF Advocates does not expect any significant changes in legal and regulatory costs. “Our recent experience has shown that hedge fund managers are increasingly cost-conscious and indeed there is a significant difference in costs between global and local firms,” he says.

Daniel Mackelden at Cains in the Isle of Man thinks it is too early to say how pricing will go. “One might anticipate a downward pressure on fees as firms compete for new business. However, to the extent that the funds themselves may become more complex and less vanilla, then novel and innovative structures may actually command increased fees,” he says.

Wilton McDonald at Higgs Johnson Truman Bodden & Co in the Cayman Islands agrees that increased regulation and scrutiny will “likely contribute towards raising costs to set up new funds. There is already a reduction in terms of new fund structures so margins on start-ups tend to be higher to enable law firms to maintain current fee levels.

“On the other hand, the need to attract new business in lean times has forced firms, especially smaller ones, to be innovative, to add value wherever they can, to market more aggressively and yes, to slash fees as well,” he says.

Hannah Terhune at Capital Management Services Group in New York agrees small law firms charge less than larger ones. “There are significant cost differences between law firms and lawyers,” she notes.