Best practice in corporate governance is essential for hedge funds, which are increasingly seeing investment from demanding institutional investors. The role of the non-executive director is particularly important for dispute resolution and for overseeing the work of the investment manager to ensure that the objectives and risk appetite of the fund are respected. The hedge fund board is vested with fiduciary duties based on the basic principles of fund management.
For hedge funds, best practice in corporate governance is essential. Corporate governance, which structures oversight at a financial institution, ensures transparency and capable management of risk – investors in hedge funds have a right to expect best practice.
It is, of course, the board of directors that must take the responsibility for achieving best practice – and the board can find considerable support in board portals and other boardroom technology.
This is particularly important for the hedge fund industry, as the number of institutional investors in hedge funds is on the rise around the globe. In a survey, 73 per cent of respondents, institutional investors on a global basis including funds of funds, family offices, consultants, endowments and foundations, private banks and pension funds representing almost US$700 billion in hedge fund investments, say they would be likely to make additional hedge fund allocations.
Institutional investors have been increasingly focusing on the level and quality of corporate governance at UK hedge funds, with an eye on the board of directors, notes a recent Carne Group study. They are concerned about the basics of corporate governance structure, as well as about the role of independent directors.
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Essentials of hedge fund corporate governance
Hedge fund governance refers to a system of checks and balances and the responsibilities assumed by the board of directors. The system is structured according to four basic principles, as a recent report shows:
- To ensure that the fund is operated in the best interests of its investors;
- To oversee management, so that the hedge fund will be managed in accordance with the fund’s declared investment objectives;
- To make certain that the assets of the hedge fund will be kept safe; and
- To make certain that, when investors redeem their shares, they will get their pro rata share of the investment fund’s assets.
The hedge fund board is vested with fiduciary duties based on these principles. Although the objective of fund governance is investor protection, fiduciary duties typically require the board to act in the best interest of a fund taken as a whole and not any particular investor.
There is, of course, a key difference between hedge funds and other companies: They have no employees. A service provider is responsible for all operations, working with the investment manager. While this simplifies the role of the board in some respects, it also increases the board’s level of responsibility. Day-to-day managerial responsibilities are typically delegated to the investment manager and the fund administrator.
Directors at hedge funds must both appoint service providers, and act as oversight for them. There can be conflict, because each service provider is governed by its own governing body which is independent of the fund. The role of independent board members in this context can be most important, so corporate governance practice for the selection of non-executive directors should be followed carefully.
The non-executive director should play a key role in dispute resolution, and should be an important internal safeguard, ensuring that the fund manager does not have a completely free hand with investors’ capital.
This should not suggest that directors at hedge funds have a limited role.
“On the contrary, hedge fund boards of directors typically serve as monitors of risk and investment strategies. The hedge fund has been formed to pursue the investment objectives defined by the mission statement manager as negotiated and agreed in the fund documents by its shareholders and the chairperson,” the report points out.
The investment manager is charged with pursuing the investment strategy, and the board of directors does not advise the investment manager on portfolio strategy or securities selection. But the fund directors must oversee the work of the investment manager, and ensure that the risk appetite and strategic direction of the fund remain faithful to the prescribed objectives. Thus, while the advisory role of hedge fund directors is limited when compared with that of corporate directors, the responsibilities remain the same.
A board portal can provide much-needed support for hedge fund directors as they shoulder these responsibilities, particularly as hedge funds tend to keep much of their strategy confidential. Discussion of aspects like risks being run or whether the overall investment climate is favourable to the current strategy that the investment manager is following should take place in a secure environment, and information about the return on investment for the fund’s capital, for example, should be available to directors, but not to other potential readers.
A board portal provides a secure archive of information about the hedge fund for the use of the board of directors, as well as a secure environment in which to message and collaborate on documents.
Diligent Board Portal resolves these issues for banks
Diligent Boards moves all of the agendas, documents, annotations and discussions of board meetings online into one intuitive, secure portal. The platform goes beyond digital board books to manage the full scope of a board’s moving parts — committees, contacts, voting, reporting and more.
With Diligent Boards, on-the-go directors will have more than iPad board meeting software at their fingertips. From a single sign-on (even for multiple boards), they’ll be able to work across devices (with real-time syncing) to keep up with committee meetings and materials and communicate effectively in a secure environment, with the ability to annotate documents in tandem with other users and to get notifications for updates, easily search archives and board resources, complete questionnaires, and submit their votes and signatures any time of the day or night, from anywhere in the world, from their smartphone, tablet or laptop.
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