What impact do you expect impending regulation to have on the legal profession and hedge fund clients? Will there be permanent and significant changes? What will be the main regulatory concerns hedge funds will face in the future?

“Given the current international political climate,” notes Henry Smith at Maples and Calder in the Cayman Islands, “it is likely that there will be increased regulation of hedge fund managers. But the format and scope of that regulation is not yet clear.”

He thinks it is likely there will be registration requirements for managers and increased due diligence as a starting point at the least. “We are seeing more investor-driven due diligence on fund managers and more investors demanding to see independent administrators and service providers around the fund managers and funds,” he says.

“We are closely watching the proposed EU alternative investment fund managers directive as it progresses through the EU’s legislative process,” he reveals.

Jonathan Tonge at Walkers thinks the impact of legislation will depend “entirely on the extent of any new regulation, including whether it affects the fund or just the investment manager. If certain registration requirements are imposed, this will obviously place an administrative and potentially costly burden on the affected parties. However, as long as the regulation is appropriate and not excessive, we believe it can bring long-term benefits to the industry and its reputation.”

In the British Virgin Islands office of Conyers Dill & Pearman, Robert Briant thinks a more significant change than regulation is the increased scrutiny that investors are giving to hedge funds. “This will require hedge funds to adopt a more transparent structure and ensure that the ‘t’s’ are crossed and the ‘i’s’ are dotted. With respect to regulation, any proposed regulation will increase the regulatory burden on funds while at the same time, arguably, give greater safety to investors,” he states.

“I would not anticipate that this would have a negative impact on the growth of the hedge fund industry,” says Briant, “although it will increase the cost of launching and maintaining a hedge fund and may eliminate some of the more marginal funds. Like taxes, regulations are rarely decreased.”

Gray Smith at Appleby believes regulation is inevitable in the US and EU but adds “we are all unsure as to what form that will take”.

“We are seeing regulation moved to the morning of the first day at conferences which shows that managers are more and more interested in an area they previously had as little to do with as possible,” says Smith.

He says a law firm is going to have to be able to advise authoritatively on a range of jurisdictions “if it is to be able to demonstrate that it can identify the best structure and domicile for a fund. The changes will be long term. The main concern will be restrictions on what a manager can do, costs of compliance and restrictions on marketing,” concludes Smith.

Ogier’s Simon Schilder agrees that it is too early to say how some of the regulatory initiatives currently being debated will ultimately play out and impact on hedge funds. “In our view hedge funds will continue to adapt and evolve with the evolving regulatory landscape, both in terms of how regulatory considerations impact upon how they actually invest and so generate their investment returns and also in what regulatory considerations impact upon the parameters in which they operate,” says Schilder.

Daniel Mackelden at Cains in the Isle of Man expects both on and offshore firms will “need to be adaptive to any new regulatory regimes although it is somewhat difficult at the moment to define where the goalposts will be short to medium term.”

Dermot Deering at Hassans in Gibraltar expects greater use of Ucits III structures will be the main impact of impending regulation. “Migration of funds from outside the EU to Dublin, Luxembourg and Gibraltar will also be a factor,” he predicts.

Brian McDermott and Siobhán Moloney at A&L Goodbody say they have seen a distinct move away from less regulated jurisdictions such as Cayman and the British Virgin Islands to onshore jurisdictions such as Ireland. This shift has been caused by the demands of institutional investors for a more robust regulatory environment.

Investors already spooked by the Madoff fraud, the Stanford Bank disaster and the ongoing financial crisis are increasingly viewing regulated funds as the better option for hedge fund investment, they believe.

In London, John Langan at Withers agrees the impact of the Madoff affair is likely to be increased regulation in many jurisdictions. “Hopefully the upshot will be sensible supervision rather than overly prescriptive and meddlesome changes,” he says.

“Regulation of hedge funds will of course have a material impact on their operations,” points out Sonya Van de Graaff at Brown Rudnick. “Many hedge funds have minimal back office personnel and so this will be an added expense,” she says.

“The problem with any regulation is that unless it applies equally worldwide, there will necessarily be a migration of funds to jurisdictions with less regulation. This will not be in the interests of Europe,” says Van de Graaff.

Angela Hayes at Mayer Brown in London says the biggest imminent regulatory issue for the European hedge fund industry is the EU alternative investment fund management directive. “It is hard to believe that current restrictions on marketing third country funds in the EU could be allowed to stand because that would fundamentally change the existing tax-efficient market structures. Assuming that this fundamental point will be changed, then despite tinkering with regulation, the overall feel of the industry will probably continue largely as before. In that case the most significant industry issue will be the recovery of investor confidence,” she concludes.

“Hedge fund management is undergoing a fundamental transformation,” declares Mitch Nichter at New York law firm Paul Hastings. “Increased political and media scrutiny combined with a major shift in investor expectations, the ongoing credit and liquidity crisis, higher regulatory compliance costs and lower returns, seem to make significant changes in the industry unavoidable,” he says.

“Managers will need to invest more in compliance and risk management and be able to prove to investors and regulators that these are important integral components of the investment products offered,” he suggests. Less manager discretion in fund operations will become more common. “Managers will need to develop investment strategies that can operate effectively and efficiently in an environment where leverage and the use of derivatives and shorting are more costly, less readily available and more regulated, and in a world where strategy and holdings information will be more readily available to regulators and competitors,” he concludes.

Steven Nadel at Seward & Kissel believes that if the SEC registration rule passes “it will create a barrier to entry, due to the added compliance costs to register and to maintain same.” He says managers will need to, among other things, designate a chief compliance officer and adopt and implement robust compliance policies.