Hedge Fund Directors Are Useless, Most Investors Say

Survey respondents think hedge funds should be liable for operational failures

Nearly three-fourths of investors say hedge fund directors don't serve a useful function. Nearly three-fourths of investors say hedge fund directors don't serve a useful function.

Hedge fund directors don’t get much respect these days.

Corgentum Consulting, a provider of hedge fund operational due diligence reviews and background investigations, reported last week that 73% of investors and operational due diligence analysts surveyed felt directors did not serve a useful function.

Worse, 76% said directors did not provide true independent oversight of funds.

“Offshore jurisdictions and fund directors have an ongoing public relations problem when it comes to investors,” Corgentum managing partner Jason Scharfman said in a statement.

Competent hedge fund directors can add value to the overall governance of a fund, Scharfman said, but many investors viewed them simply as an extension of the fund itself.

“Compounding the problems, 62% of the group surveyed felt directors didn’t have much credibility with fund managers,” he said.

Corgentum conducted the survey as part of its 2014 webinar series. Respondents represented operational due diligence analysts and hedge fund investors, ranging from ultrawealthy individuals and family offices to pensions, endowments, banks and insurance companies.

The survey also found investors and operational due diligence professionals at odds over how many directorships were appropriate.

Approximately 31% thought that the number of fund directorship positions should be capped at 15, while 24% wanted a nine-directorships cap.

Corgentum noted that this challenged previous industry research that had shown a higher investor tolerance for more board positions.

The survey found that 63% of respondents thought the most important function of a director was to serve as an investor watchdog.

Again, this was contradicted the realities of hedge fund investing, Corgentum said, in that directors have virtually no ongoing interaction directly with fund investors.

Seventy-one percent of investors and operational due diligence analysts surveyed felt that directors should be held personally liable if a fund failed for operational reasons.

Corgentum said this finding builds on court decisions such as the Weavering case, in which the Grand Court of the Cayman Islands found two former directors of the failed Weavering Macro hedge fund guilty of willful neglect or default in the discharge of their duties.

In an interview with Hedge Funds Review, Scharfman noted that survey data had showed many investors were either not researching or were under-researching directors.

“This represents a significant missed opportunity to increase their understanding of the governance mechanisms in place at funds,” he said. “Through operational due diligence, investors and operational due diligence analysts can separate the better directors from the pack.”

 

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