November 26, 2007

Q&A: A Hedge Fund Early Adopter

Attorney Eric Roper met the industry on the ground floor

By Yael Bizouati

Eric Roper, a senior partner at Gersten Savage and chairman of the firm's financial services practice, was one of the first attorneys to work with hedge funds. He got involved in the industry when a friend of Alfred Winslow Jones -- the pioneer who is credited with forming the first hedge fund -- asked for some advice.

At Gersten, which he joined in 2000, Roper specializes in the creation, structuring and representation of domestic and offshore investment entities, broker-dealers and clients engaged in raising capital pools for investment in public markets and private venture capital.

He has been elected to three terms as a delegate to the House of Delegates of the New York State Bar Association and is a Fellow of the New York Bar Foundation. He is a co-founder, director and honoree of Hedge Fund Cares, an industry-related charitable organization founded nine years ago to protect abused children, and is also a member of the board of United Neighborhood House, a New York City-based non-profit. IDD recently spoke to Roper about the early days of the industry, his current view, and his charitable work, among other things.

IDD: Can you talk about your background and how you first got involved with hedge funds?
Roper: In the mid '70s I had a friend, Alex Porter, who I worked out with at the New York Athletic club, and he wanted to start a fund. He had previously worked with Alfred Winslow Jones. I told him I really didn't know how to do this, and he said "I'll pay you to learn." That was my start in the industry.

We started a long-short fund and at that time the industry barely existed. He had the skill set and experience but we were all new kids on the block. It was very successful. I put together the offering documents and enlisted the help of some other securities professionals and found an auditor, Paul Koren, who had a familiarity with hedge funds and that's how it all started. I had only recently started my own firm, so I was doing other work, actually in the entertainment area, besides this new skill set.

IDD: So what kept you in the business after that?

Roper: One person refers you to another person. It became "a business" when we were recommended as someone who knew how to set up funds. It was a question of generating relationships and some contacts. Now it's a very big, crowded, pushy industry and I think there are a lot of people at the table and it's a much more static structured industry than it was before.

IDD: What were some of the hurdles to getting into the business in the early days?

Roper: The biggest hurdles were trying to figure out which provisions should be in the documents -- openings, closings and minimum withdrawals. There was not a lot of industry knowledge to draw upon. There were many business-related questions that we didn't have a great perspective on, and there was no network to rely on, nor body of industry knowledge. Ultimately you become more refined in your thinking and decision making because so many issues have arisen over the years that weren't in the picture at that time.

IDD: Do you think it's easier to set up a fund now?

Roper: It was not easy then nor is it now, for several reasons. Then, it was such an unknown commodity you had to explain it to everyone, and now the field is very crowded in terms of start ups, and investors are much more sophisticated. They want risk management reports, various metrics about the decision making, transparency -- it's no longer one or two guys and a computer. There are also many more sophisticated investment products and skill sets in the usage of them that now distinguishes one manager from another.

IDD: How has the hedge fund industry evolved?

Roper: There are lots of young people who are making tons of money. Also, the service provider industry has experienced huge growth among auditors, administrators, lawyers and prime brokers. In the '70s, there were no industries addressing hedge fund needs. The regulatory environment also got a lot tougher, but curiously there are still plenty of ways that you can manage a fund without getting into regulatory difficulties. You just need to have counsel that understands the regulatory environment and a client that follows those rules and regulations with our assistance.

IDD: Do you think the industry needs more regulation?

Roper: I don't think so, because the investor community is, for the most part, quite sophisticated. When you have funds-of-funds, family offices or substantial accredited investors, they know what to look for. I can't speak for everybody, but I think there is a lot of interest in transparency and risk metrics and those things are self correcting even without regulatory intervention.

IDD: What about what happened with the Bear Stearns hedge funds?

Roper: You have to look at it from a macro perspective. I think that there are lots of funds out there which are doing fine as long as they're sticking to their knitting in terms of their strategies. I also think that the Bear Stearns fund losses have to be put in context of losses over the entire banking community. The subprime debacle that hit Bear Stearns is just a visible illustration of what's going on all over the world. Bear Stearns has plenty of company.

If someone wants to cook the books and execute subterfuges to calm investors' nerves as a part of a scheme, fine, but most people I read about don't have the nerve to do all those things, such as creating their own audit information. Many funds failed just because they don't stick to their strategies and skills, they take risks here and there. Others can't just sit there with 300 million in their trading account and pretend it's not their own money.

The industry is actually much more self-regulated than the SEC believes. When you look at due diligence questions forms from prime brokers, auditors and administrators, there are lots of ways the industry becomes self correcting.

IDD: How has the credit market turmoil affected hedge funds?

Roper: One man's meat is another man's poison. It happens when you have a large virus spreading through the investment system. Investors and managers look at that and say, "Gee, I see a way to profit from it." Some people in the marketplace have been on the right side on these issues, such as the short seller Jim Chanos. Jim is one of the early managers to detect the whole Enron problem. There are lots of smart managers that see opportunities where other people don't.

IDD: Where do you see the industry going now?

Roper: I think that one of the results of this subprime event is causing major layoffs. This will also have a new group of skilled professionals wanting to begin a new career as a hedge fund manager. Not because it's their first choice but because there are a lot of smart people out of work. So it's not inconceivable that the hedge fund market will absorb some of them. Some also say that the industry is being tapped out, especially with start ups, but my phone still rings!

IDD: Can you talk about hedge fund developments overseas?

Roper: The industry is booming in London. The offshore industry generally is where considerable money is trying to find a place to invest and it's been growing tremendously, partially as more countries realize the value and importance of it. Germany has lightened up its tax treatment for hedge funds. I also heard that some Latin American countries are considering changing their view of offshore jurisdiction as tax havens.

IDD: Can you talk about your charity?

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