HFSB updates hedge fund standards
The Hedge Fund Standards Board (HFSB) has updated its standards as the organisation seeks to expand into the US and Asian markets.
Fund governance standards is one area, which the HFSB hopes to improve in the US and where US managers have been lagging behind. “Strong governance has always been a key theme for the HFSB. But not all hedge funds have independent governance, and certain limited partnership structures do not require an independent board of directors. The changes to the standards strengthen the independent oversight, but also cater for approaches where there is no independent board. We are confident that the revised standards will attract interest in the US,” said Thomas Deinet, executive director at the HFSB.
Corporate governance standards are the topic of the day among institutional investors, particularly in light of the recent Weavering Capital judgement and the ongoing Bear Stearns case. In a statement, the HFSB said “that where a fund does not have an independent governing body in place to protect investors’ interests, there should be an obligation (for a hedge fund) to ask for investor approval before key actions may be taken which may involve a potential conflict of interest.” Although Deinet said the amendments were decided upon a long time before Weavering entered the fray.
Investors, particularly in Europe but increasingly in the US, are becoming more alert to corporate governance shortfalls. A survey of institutional investors managing $600 billion in assets by Carne Group, revealed 91% of allocators would shun a fund with poor governance even if the manager met other operational and performance criteria. Furthermore, 76% of investors already failed a fund at least once because of governance concerns.
The HFSB has also urged managers to bolster disclosure and transparency, risk management, consistency in valuation and compliance with market abuse legislation. “In 2008, the hedge fund industry was criticised for a variety of issues and the document should help rebuild its reputation. Since the crisis, we have seen a major institutionalisation of the hedge fund industry and these updates will help cement that and demonstrate maturity,” commented Deinet.