GAM, Man Could Face Patent Dustup
April 11, 2005
GAM, the global investment management firm with $38 billion in assets, could be in for a rocky ride and possible monetary damages if its new U.S.-based hedge fund restructuring initiative trips over hedge fund behemoth Man Investments' pending patent filed just weeks ago.
The patent request seeks to cover the specific hedge fund structure that Man believes it created last year with tax-exempt investors in mind. This precise hedge fund structure is what GAM plans to shortly mimic with at least one of its U.S.-based, SEC-registered hedge funds.
GAM, with offices in New York City and eight other worldwide locations, has been an indirect, wholly owned subsidiary of Swiss banking corporation UBS AG since 1999. GAM and Man Investments are head-to-head competitors in the alternative investment universe.
On March 31, GAM filed documents with the SEC disclosing that it intends to restructure its current GAM Avalon Lancelot registered hedge fund-of-funds under a master-feeder structure and rename the master fund GAM Avalon Multi-Strategy Investments. Through this restructuring the investment firm will be able to offer a new feeder fund to be named the GAM Avalon Multi-Strategy (TEI). (The TEI designation stands for tax-exempt investors). This new fund will allow tax-exempt as well as tax-deferred investors to invest in GAM's offering, but circumvent the dreaded "unrelated business taxable income" (UBTI) that hedge funds can often kick up.
UBTI is income that is often triggered by various leveraging techniques that hedge funds employ, such as the borrowing of money to invest in additional securities. But as explained in GAM's recently filed registration document, the Cayman Islands structure "enables tax-exempt investors to invest in the fund without receiving income in a form that would otherwise be taxable to such investors regardless of their tax-exempt status."
On a Pending Patent?
But this new initiative could spell trouble and monetary damages for GAM if Man successfully wins a patent for this type of hedge fund structure that it says it created last year. Moreover, it could mean trouble for others, including Deutsche Bank, which late last year launched its similar Topiary Fund for Benefit Plan Investors.
On May 1, 2004, Man Investments, the global hedge fund manager with its U.S. office hub in Chicago, debuted its new SEC-registered Man-Glenwood Lexington TEI fund-of-hedge funds, which was built as a feeder fund to the original Man-Glenwood Lexington hedge fund launched in January 2003.
The new fund spinoff was created to cater to endowments, foundations, employee benefit plans and other tax-exempt investments, including IRA and rollover plans. The structure Man devised created an offshore investment fund in the Cayman Islands through which investments would then be invested back into the master Man-Glenwood Lexington hedge fund portfolio.
In order to assure it wouldn't stumble into a regulatory quagmire, Man received a formal no-action letter from the Securities and Exchange Commission on April 30, 2004 regarding this structure. While a no-action letter is not an explicit blessing from regulators, it does offer a level of comfort by assuring that the SEC would not recommend enforcement action against Man for its registration of this hedge fund.
According to publicly filed fund documents, Man has successfully attracted $15 million to that feeder fund since inception. The greatest interest has been among wealthy individuals with IRA or rollover assets to invest, said a source familiar with the product.
That successful product creation, and recognition of the potential IRA rollover marketplace, apparently led Man Investments to apply for a patent on this particular hedge fund master-feeder structure sometime earlier this year, although the details of this patent are still a closely guarded secret.
Man officials could not be reached for comment by press time.
Patents for new inventions as well as specific business methods - under which Man's intended patent would likely fall - can take several years to come to fruition, explained Malvern ("Griff") Griffin, a partner with Sutherland Asbil & Brennan's Atlanta office and an expert on software and business method patents. "A business method patent is probably the most difficult patent to obtain," Griffin said.
Business method patents in particular can take more than three years to be approved, if they are approved by the United States Patent Office, he said. An examiner can take one to two years to make a preliminary assessment of what existed in the public domain at the time of the original application, with a second level examiner taking another year or even 18 months after that. And this lengthy process doesn't guarantee a patent will eventually be allowed, he noted.