15 Nov 2010
A White Paper released today reviews the role of the non-executive director in the hedge fund industry and finds significant failings in the service provided. The document, published by independent consultant HedgeDirector, claims that the directors of offshore hedge funds are frequently “under-qualified” and “over-stretched", and says that they fail to deliver an adequate standard of governance for institutional investors. The report concludes that hedge fund investors need to become more vocal on this issue and insist upon professional standards of oversight from the offshore boards.
This White Paper comes in the wake of similar criticism by large investors including PAAMCO in the US and the University Superannuation Scheme in the UK.
HedgeDirector’s founder, Kevin Ryan, argues that the reforms being enacted in traditional fund governance, following the Walker report in the UK and Dodd-Frank Act in the US, should equally be applied to the world of alternative investments. Ryan says that as institutions, such as Pension Funds, allocate a greater percentage of their portfolios to hedge funds, they have to demand the same ‘best practice’ governance from their hedge fund boards, as they do from their traditional investments. The same duty of care is owed on both.
The report highlights the continued prevalence of conflicted non-executive directors who are supplied by the hedge funds’ offshore service providers, or their affiliates. This practice gives rise to the perception that the non-executive directors are merely rubber-stamping the decisions of the fund manager, and not operating freely in the best interests of the Fund and its shareholders. The report contends that the majority of every board should be staffed by directors who are clearly independent of undue influence by the fund manager.
Another problem area, according to the White Paper, is the size of directorship portfolios. Some individual directors are on the boards of literally hundreds of different funds, a situation which Ryan says reflects very badly on the modern hedge fund industry. He says that directorship portfolios of this size are “unacceptable” and he calls on the offshore regulators to place limits on the number of directorships, and to make public the lists of positions, held by each individual.
The skillsets of the board also come under fire, specifically for a lack of asset management expertise. The White Paper quotes the advice of the Alternative Investment Management Association and the Hedge Fund Standards Boardand says that without fund management experience in the boardroom, the board is not properly qualified to monitor the portfolio manager. Ryan says that, even now in the wake of high profile fund blow-ups and the financial crisis, that the vast majority of boards contain little or no actual portfolio management experience. As a consequence of this missing skillset, he says that “in practically every hedge fund collapse to date, the offshore directors have missed the danger signals and provided no advance warning to investors”.
The White Paper calls on hedge fund investors to perform more thorough due diligence on the identities of the non-executive directors and to pressure hedge funds into raising the quality of their boards. Ryan says that, with increasing institutional investment, and more regulatory focus on hedge funds, it has become essential for hedge funds to provide their investors with a higher standard of governance than the industry has historically tolerated. The paper says that more asset management professionals need to become involved as non-executive directors and calls on hedge fund managers and fund-of-fund managers to make themselves available for these roles.
This White Paper comes in the wake of similar criticism by large investors including PAAMCO in the US and the University Superannuation Scheme in the UK.
HedgeDirector’s founder, Kevin Ryan, argues that the reforms being enacted in traditional fund governance, following the Walker report in the UK and Dodd-Frank Act in the US, should equally be applied to the world of alternative investments. Ryan says that as institutions, such as Pension Funds, allocate a greater percentage of their portfolios to hedge funds, they have to demand the same ‘best practice’ governance from their hedge fund boards, as they do from their traditional investments. The same duty of care is owed on both.
The report highlights the continued prevalence of conflicted non-executive directors who are supplied by the hedge funds’ offshore service providers, or their affiliates. This practice gives rise to the perception that the non-executive directors are merely rubber-stamping the decisions of the fund manager, and not operating freely in the best interests of the Fund and its shareholders. The report contends that the majority of every board should be staffed by directors who are clearly independent of undue influence by the fund manager.
Another problem area, according to the White Paper, is the size of directorship portfolios. Some individual directors are on the boards of literally hundreds of different funds, a situation which Ryan says reflects very badly on the modern hedge fund industry. He says that directorship portfolios of this size are “unacceptable” and he calls on the offshore regulators to place limits on the number of directorships, and to make public the lists of positions, held by each individual.
The skillsets of the board also come under fire, specifically for a lack of asset management expertise. The White Paper quotes the advice of the Alternative Investment Management Association and the Hedge Fund Standards Boardand says that without fund management experience in the boardroom, the board is not properly qualified to monitor the portfolio manager. Ryan says that, even now in the wake of high profile fund blow-ups and the financial crisis, that the vast majority of boards contain little or no actual portfolio management experience. As a consequence of this missing skillset, he says that “in practically every hedge fund collapse to date, the offshore directors have missed the danger signals and provided no advance warning to investors”.
The White Paper calls on hedge fund investors to perform more thorough due diligence on the identities of the non-executive directors and to pressure hedge funds into raising the quality of their boards. Ryan says that, with increasing institutional investment, and more regulatory focus on hedge funds, it has become essential for hedge funds to provide their investors with a higher standard of governance than the industry has historically tolerated. The paper says that more asset management professionals need to become involved as non-executive directors and calls on hedge fund managers and fund-of-fund managers to make themselves available for these roles.
