Investors welcome all the help they can get in conducting due diligence on potential hedge fund investments.
On Thursday, the Hedge Fund Standards Board proposed three changes to current standards to help investors assess conflicts of interest as part of their due diligence.
The HFSB noted that this was the fourth time it was consulting with interested parties on amending its standards since they were first published in 2008. The board is taking comments until June 12.
At present, the HFSB has 123 hedge fund signatories representing $700 billion in assets. Forty percent of these are based in North America, 42% in the U.K. and 13% in the rest of Europe.
Investor chapters comprise 60 sovereign wealth funds, endowments, pension funds, funds of funds, private banks and investment consultants that collectively represent $500 billion. Forty percent are located in North America, 31% in the U.K., 16% in Europe and 13% in Asia/Pacific.
One proposed amendment would require disclosure of similar funds, accounts or vehicles, including partner/employee funds, upon request.
Current standards require disclosure of the existence of parallel funds (including aggregate assets under management) that employ the same strategy to allow investors to assess their investment in the context of the overall allocation to the strategy.
However, the paper says, these do not explicitly address situations in which funds/accounts are not identical but in which sufficient overlap exists to create a potential conflict of interest.
The proposed amendments would do the following:
- Widen the scope by referring to “similar” investment strategies rather than just strategies that are the “same”
- Provide transparency around the co-investment of partners/employees in the strategy
- Disclose the existence of partner/employee-only funds and their aggregate size
A second proposed amendment addresses a hedge fund firm’s trade allocation policy.
According to the paper, it is now common practice (and often a regulatory requirement) for hedge funds to establish a trade allocation policy. This helps investors assess a manager’s allocation practices and detect potential conflicts.
The proposed standard would require the disclosure of the trade allocation policy to investors upon request.
The third proposed amendment concerns internal arrangements to mitigate conflicts of interest.
The paper says regulations in many jurisdictions cover conflicts of interest with varying levels of detail. In the U.S., for example, Form ADV sets out a manager’s fiduciary duties and requires full disclosure of all material conflicts of interests that could affect the advisory relationship.
The HFSB says that managers who comply with such regulations will very likely comply with the following proposed standard:
“A manager should ensure that it has internal arrangements to manage and mitigate conflicts of interest, and this should include documented compliance policies and procedures (e.g. conflicts of interest policy). Conflicts of interest should be recorded and reported to senior management on a periodic basis.”
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