What new services will the legal profession offer over the next 12–18 months? Will legal firms continue to diversify into other hedge fund-related activities (such as fund administration, marketing support, provision of directors) or should they focus purely on legal services?

“Law firms themselves are unlikely to diversify from the provision of legal advice and matters ancillary to that,” says Nicholas Butcher in the Cayman Islands office of Maples and Calder. “However, we expect there will be additional services resulting from technological advances such as increased client access to information via the online availability of registers and other corporate documentation.”

Diversification, he says, has been happening for a number of years through affiliated service providers. “Any further diversification is likely to be conducted by affiliated entities rather than directly by law firms. A service provider affiliated to a law firm can benefit from synergies, leveraging off the knowledge and expertise of the law firm while maintaining independence,” he notes.

“We certainly expect to see some expansion into hedge fund-related activities as the legal profession continues to adapt and respond to market conditions,” admits Ingrid Pierce at Walkers in Cayman.

Tania Dons and Richard Finlay at Conyers Dill & Pearman in Cayman confess they have seen a dramatic increase in investors approaching the firm to perform due diligence services and/or comment on fund-related documents for Cayman-domiciled funds they are considering investing in. As the fund industry becomes increasingly regulated they expect to see an increase in advising on the implication of the new rules.

Depending on the regulation they suspect legal advisors will need to be innovative and creative in helping funds pursue their investment activities in compliance with the rules in a way that is workable and profitable.

In the British Virgin Islands office Robert Briant expects to see changes in the hedge fund industry as investors and regulators scrutinise more closely the funds and their structures. “Legal counsel is able to provide support to a hedge fund to ensure that the hedge fund’s structure is capable of such scrutiny by investors and regulators and is compliant with any changes in regulation,” he says.

As for the diversification of law firms into other hedge fund-related activities, such as fund administration, Briant expresses some concerns. “The hedge fund is the law firm’s client and the hedge fund’s interest is the law firm’s primary duty. When a law firm starts diversifying its practice into support functions, such as administration, it begins to run into conflicts of interest that make it difficult for the law firm to provide independent advice. These points of tension reach a critical stage in a crisis, such as during a recession,” points out Briant.

His colleague Dawn Griffiths in Bermuda agrees. “Law firms must focus on providing the best legal services, first and foremost. It can be beneficial to clients to have a one-stop source for all fund-related activities but discerning clients still look for the best in any field,” she says.

It will be a “distinct challenge, probably impossible, for any provider to be best of field in each of these areas and clients may not be as willing to compromise on quality just for easy one-stop access to such varied services,” she says.

In Gibraltar associate at Isolas Joey Garcia believes the legal profession will need to continue to adapt to provide value-added services, potentially creating synergies between existing client bases and associated businesses and in promotional activity relating to investor security.

He expects to see legal firms adapting themselves to the current economic and regulatory environment. “We envisage that there will be an increased demand for legal firms to take a more proactive role in advising a fund on any potential flaws which could materialise in the operational structure of a fund, in particular, due to the various parties’ involvement in the operation of the fund and the possibly conflicting roles each plays,” he states.

Daniel Mackelden at Cains in the Isle of Man thinks diversification will become key for some of the larger hedge fund-orientated offshore firms. “Some already are providing these value-added, integrated services and we can see these becoming more important as business models change. UK firms will be facing similar issues with liberalisation here – the days of the pure law firm may well be numbered,” he says.

In Malta at Aequitas Legal, associate Omar Zerafa believes that if hedge funds are regulated in the EU, the legal profession will have to adapt itself and mirror the needs of the market. “These new services may include closer scrutiny of taxation laws, specialist advice on moving funds across the EU, together with advisory services to the administrator, the manager and the custodian of the fund,” he states.

Brian McDermott and Siobhán Moloney at A&L Goodbody in Dublin would rather offer impartial recommendations to clients on the fund administration service providers that are best suited to their individual client needs without being fettered by an obligation to promote any in-house capabilities. They expect firms to focus more on legal services due to the increasing concerns around potential conflicts of interest arising from the provision of other services.

They also think additional services that compliment the pure legal services will be attractive. These include providing company secretarial services and acting as listing broker for funds listing on the Irish Stock Exchange. There is also an increasing trend, they point out, of resorting to law firm experts in dispute resolution as the amount of fund-related litigation increases.

John Langan at Withers says there are significant regulatory constraints on the services the legal profession can offer. “On balance, law firms should probably focus on ensuring that they offer funds the full range of services they need following creation: tax advice, litigation advice, advice on investment structuring and regulatory and securities law advice,” he says.

Nora Bullock and Simon Atiyah at Lovells agree. They think it is unlikely that global full-service law firms will branch out and take on directorships and fund administration and similar roles. However, for niche offshore law firms, the position is different and they say they have already seen a number of these offshore firms providing other fund services.

At Kaye Scholer, partner Simon Firth expects new services to include operational due diligence working alongside accountants and pension consultants as well as transfer pricing advice. He says some law firms have already started to move into this area. “The areas you specifically mention relate to offshore firms and not onshore firms. The only likely service to apply to an onshore firm would be acting as director but I can’t see many firms taking that route because of liability issues,” he says.

In the US, law firms are limited with respect to their ability under the legal ethics rules to perform non-legal work, points out Steven Nadel at Seward & Kissel. “However, on the legal side managers will continue to seek law firms who can do more legally than just form the funds. They wants law firms that can act as their de facto general counsel,” he says.

Mitch Nichter at law firm Paul Hastings agrees. “From a US law firm perspective, I do not anticipate diversification into activities that do not involve the provision of legal services,” he concludes.