There are many different types of hedge funds (e.g. macro, long-short equities, fixed income, etc) and the strategy or strategies that an investment manager runs will to some extent dictate the role of an in-house lawyer.
Also, the role of an in-house lawyer will vary depending upon the life cycle of the fund.
It is worth pointing out that in-house lawyers are typically partners in or employees of an investment manager rather than the fund or funds themselves which are typically domiciled offshore.
At the inception of a fund, the lawyers will be heavily involved in the structuring of the fund and agreeing the terms of and documenting the key agreements that allow a fund to operate.
These agreements generally include a prospectus/offering memorandum, subscription documents, an investment management agreement between the investment manager and the fund and an administration agreement with the third party fund administrator.
All funds need agreements with counterparties in order, amongst other things, to allow them to execute trades and to custody assets.
Negotiating such agreements (e.g. custody, prime brokerage, executing broker, ISDAs, repo and stock loan agreements) with banks and brokers can take some time.
The identity of counterparties is likely to change over the life of the fund resulting in a need to negotiate trading documents throughout the life of the fund.
Counterparty risk has become a major issue for hedge funds and the terms of counterparty agreements have come under close scrutiny following the collapse of Lehman Brothers.
Portfolio managers will need ad hoc advice in relation to proposed investments.
For example (i) the tax treatment of particular investments (be they physical or synthetic) can be crucial and it is often necessary to obtain advice from counsel in the relevant jurisdiction; (ii) funds that trade in the secondary bank debt market will need to review the key terms of finance and security docs prior to making any investment, and (iii) activist funds will rely on legal to ensure that the steps that they take in relation to the target company do not breach local law.
In smaller funds, it is also common for an in-house lawyer to also get involved in a compliance role and therefore an awareness of things such as disclosure regimes, market abuse and the insider dealing rules is useful.
In-house lawyers will also have to deal with legal issues that the running of the business will throw up from time to time including employment law-related issues, commercial contracts (e.g. for IT systems that are needed in the course of the business), property law issues (relating to the lease of premises) and service level agreements.
An ability to manage outside counsel and to think commercially (as well as a thick skin) are pre-requisites to being an in-house lawyer in a hedge fund.
Understanding the investment strategy and the commercial drivers to making investment decisions takes a little time but a finance background is not a pre-requisite.
There may be an opportunity to gravitate to a COO role and, in some cases, it may be possible to move into the front office as an analyst, although this is not particularly common.