Manager recommends industry qualification for hedge fund directors
“The hedge fund space is an innovative industry which is continually evolving while regulation is dramatically changing the world in which we operate. Directors need to be on top of these issues and one potential way of achieving this is by requiring them to obtain formal qualifications much like the CFA qualification for financial analysts,” said a senior hedge fund executive, speaking at KB Associates’ “Fund Governance 2012” seminar in London, under Chatham House Rules.
Such a qualification, said the executive, could be a regulatory or industry led initiative. He added an industry association such as AIMA or the Hedge Fund Standards Board could take the lead in such a move. “I believe any curriculum which directors undertake for this qualification would educate them about their roles, responsibilities and ethics, as well as keeping them up to date on all of the changes affecting the financial services industry,” he added.
Corporate governance standards at hedge funds have been a thorny issue for investors. 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. The 2011 Weavering Capital judgement has also served as an impetus for better corporate governance.
Investors such as the Universities Superannuation Scheme (USS) and Hermes BPK have routinely criticised corporate governance standards at hedge funds, and have urged managers to appoint more directors with actual investment management experience. Some high-profile institutional investors have reprimanded certain professional services firms for employing directors who act as fiduciaries to hundreds, if not thousands, of funds.
Vincent Vandenbroucke, head of operational due diligence and partner at Hermes BPK Partners, the $2.5 billion provider of hedge fund solutions, castigated the lack of transparency at hedge fund boards. “When we invest in a hedge fund, managers send us a monthly letter while their administrator sends us capital statements. However, there is no mechanism for directors to communicate with shareholders even though they represent their best interests. As investors, we usually struggle to get minutes or meeting agendas because of ‘confidentiality issues’,” he said.
Vandenbroucke added that regulators, particularly those in offshore jurisdictions such as Cayman, needed to take action to improve corporate governance transparency. “We have engaged with the Cayman Islands Monetary Authority (CIMA) and urged them to consider the requirements of institutional investors,” commented Vandenbroucke.
In 2010, the $14.3 billion Chicago-based fund of funds Mesirow Advanced Strategies sent a letter to CIMA urging it to make public all the data it collects from FAR and MF-1 forms on directors. In January 2011, the USS alongside nine other global pension funds, managing just south of $1 trillion, followed suit demanding an online database of directors. CIMA has reportedly said it is reviewing this suggestion.