What are the main considerations of a hedge fund when it chooses its legal counsel? Under what circumstances should a fund consider in-house legal services?

Jon Fowler in the Cayman Islands office at Maples and Calder believes a number of factors need to be taken into account when selecting counsel. He says these include depth of experience, range of expertise, reputation and cost. 

“Hedge funds will be looking at the ability of firms to advise on restructurings and provide effective solutions to problems as well as the ability to establish funds. Response time and quality of advice will be as important as cost,” says Fowler.

At Appleby in the Cayman Islands, partner Gray Smith believes there are a few firms in London and in the offshore world that are regarded as sufficiently expert. “They will continue to get the lion’s share of the work. There has been little movement of top lawyers from these firms to firms outside the hedge fund magic circle, and until that happens, little is likely to change. Individual lawyers at firms are now becoming more important, as firms have expanded rapidly and in certain cases diluted quality,” he says.

Tania Dons and Richard Finlay at Conyers Dill & Pearman in Cayman believe the larger fund operators and investment managers do not consider cost as the major consideration when selecting counsel. They want efficient, quality legal advice, say the pair. Depth and wealth of experience in the firm’s funds team is also a key issue, they note.

In-house legal services will likely only be required for larger investment managers and fund groups, say Dons and Finlay, where the cost/benefit analysis warrants an internal hire. They say they find it helpful to deal with in-house legal counsel who understand the relevant legal issues and can often assist in finding the correct balance between legal and business considerations.

Jonathan Tonge at Walkers thinks the main concern when selecting legal counsel is the firm’s experience and reputation in the industry for setting up and advising on the particular fund structure and its investment strategy. “Subject to the jurisdiction in which the manager or principals are located, the fund may prefer to instruct counsel in the same or similar time zone and accordingly global reach may be a factor in the selection process,” he advises.

“Certain managers will always look to counsel based in the jurisdiction of the fund’s domicile, particularly where regulatory filings have to be made. The decision will depend upon the size and frequency with which new funds are established and the extent to which documents for existing funds are updated,” concludes Tonge.

Partner Simon Schilder at Ogier in the British Virgin Islands looks to the past to inform choice. “Perhaps one of the main lessons learnt by investment managers from the current financial crisis is the importance of choosing legal counsel, both onshore and offshore, with the expertise and resources to effectively advise it through times of crisis,” declares Schilder.

“In-house legal services become feasible if the fund requires legal support on diverse issues in a  number of jurisidictions, in which case it will mostly involve a co-ordination function,” says Andre Zerafa at Ganado & Associates in Malta.

He says external counsel’s involvement is important because they are independent and will have had different experiences to bring to the table. “Integrity, independence, turnaround, experience and a solution-orientated mindset are all important considerations when choosing a law firm,” advises Zerafa.

Brian McDermott and Siobhán Moloney at A&L Goodbody Solicitors believes funds should look for firms that are able to offer a full range of legal services areas such as tax, banking, regulatory and litigation/dispute resolutions. Boutique practices are typically unable to provide this depth of specialist service, they say. The larger, more established practices typically advise on a wider range of structures and issues and can always draw on a large pool of experienced practitioners, note the pair.

Simon Firth at Kaye Scholer thinks in-house legal services should be considered once a fund reaches a size where it will save cost and can add value. “There is a difference between hiring a general counsel who is senior and can contribute to the operations of the manager as well as dealing with legal issues and a junior lawyer who may deal with relatively straightforward but time-consuming matters such as employment and IT,” he notes

Nora Bullock and Simon Atiyah at Lovells say typical considerations include skill and experience, reputation, existing relationships, cost, office locations, approachability, availability/workload, partner involvement and recommendations and referrals from other clients and service providers in the hedge fund community. They think in-house legal services are more important for larger hedge funds while the typical model for most London-based hedge funds would be a general counsel who outsources to external law firms when appropriate.

At Withers, partner John Langan says many fund managers want to show their investors that they have the ‘right’ names on the offering document. “Particularly post-Madoff the identity of different service providers to a fund has become a significant due diligence issue for investors,” he notes.

“In-house expertise, however, has an important role to play, particularly in ongoing day-to-day legal work, negotiations with investors and other third parties and generally overseeing, controlling and interpreting (for management) the work of external lawyers,” says Langan.

Maintaining an in-house legal service may be an expense that some smaller hedge fund operations may not be able to justify.  “The size of the hedge fund operation is one of the factors which will determine whether or not in-house legal services will be employed,” notes Langan. “A further element that needs to be explored is the complexity of the operation and whether in-house legal counsel will have sufficient expertise to deal with the issues the hedge fund may face.” 

For larger operations he says in-house legal services may be economic if they can provide certain core legal services and can manage the outsourcing of other advice to external legal providers. 

In New York attorney Hannah Terhune at Capital Management Services Group advises funds to find a lawyer that “you can communicate with easily and one that returns your phone calls and emails. You are working with a person and not an institution.”

Mitch Nichter, a partner at Paul Hastings, believes the primary considerations should be the professional reputation, experience and global resources of the firm and the professional reputation and experience of the individual lawyer at the firm who will be responsible for the account. Like Terhune, he believes the fund needs to “feel personally comfortable working with this individual and his or her team” and that this is vital to an enduring and productive relationship. 

“Is there genuine enthusiasm for your business or do you have the feeling that the firm is doing you a favour even considering the representation? If the firm and lead lawyer score highly on these important factors, then cost should be a secondary (but still relevant) consideration,” advises Nichter.

At Katten Muchin Rosenman co-managing partner Henry Bregstein agrees with others that breadth of expertise, especially with respect to regulatory matters is essential. In-house legal services make sense when it becomes cost-effective, he says. “When I observe a client grow to a certain size, of course relative to strategy, I often recommend hiring in-house counsel," he concludes.