Hedge Fund Standards Board Proposes Fuller Disclosure for Investors

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.”

— Check out Hedge Funds Start Year Fast on Strength of February’s 2.5% Return on ThinkAdvisor.