GAIM Ops Paris 2012: Investors should not sit on hedge fund boards

InvestorsOperational Risk
16 Oct, 2012

Major investors should not be allowed to sit on hedge fund boards as it could lead to massive conflicts of interest, it has been warned.

Speaking at GAIM Ops Paris 2012, panellists acknowledged the shareholder activism prevalent at public companies, had been noticed at hedge funds but was unlikely to result in investors gaining representation on hedge fund boards.

“Inviting a large investor to sit on the board of directors of a hedge fund is an interesting idea but poses potential conflicts of interest.  In a crisis situation, every shareholder is likely to have a vested interest and it is possible that an investor/director’s decisions would be coloured by what is best for them as opposed to the fund or other shareholders,” said Marie Halloran, senior due diligence analyst at Kedge Capital, the $6 billion family office.

There would also be liability issues for investors serving as directors. Directors have the power to suspend redemptions and impose gates – something which could bring them into conflict with other investors.  “We live in litigious times and an unpopular decision by an investor acting as a director could have legal ramifications, particularly from other investors. The responsibility and potential liabilities of acting as a fund director would discourage many investors from taking up such an offer,” added Halloran.

However, some are in favour of investors sitting on boards providing they do not have voting rights. “Having a non-voting director who is also an investor would help realign investors and managers’ interests. Any good corporate governance is supposed to treat all investors fairly and as long as there is full disclosure to other investors, I do not believe a core or strategic investor sitting on a board would be a major issue. Furthermore, if investors elected this individual to represent their interests, that could minimise conflicts of interest,” said Pierre Emmanuel Crama, head of operational due diligence at Signet Group, the Swiss-based fund of funds.

Crama added investors which sat on boards would have to be committed and locked into the fund for a minimum of three years so as to prevent them redeeming and destabilising the board.

A third way, suggested Halloran, was to have an advisory committee at hedge funds comprised of investors. “Such a committee could give shareholders a greater voice and more influence while preventing potential conflicts of interest that may arise if investors sat on the board,” she said.

Corporate governance standards at hedge funds have come under criticism since the crisis and 2011 Weavering Capital case. An Ernst & Young survey in 2011 revealed 45% of US investors and just 30% of European investors were satisfied with their hedge fund directors.

A survey of institutional investors by consultancy group Carne revealed 76% of investors have failed a fund at least once because of governance concerns while 91% would shun a fund with poor governance even if it met other operational and performance criteria.

Carne Groupcorporate governanceErnst & YoungGAIM OpsKedge CapitalParisSignet Group