Offshore board directors come under scrutiny
Some offshore resident directors are acting on behalf of hundreds of hedge funds, a practice that is increasingly difficult to justify.
At a recent conference in the US for the offshore hedge funds industry, debate among panellists and delegates focused on the subject of directors having hundreds of fund directorships at one time.
As the temperature of debate increased, so it became clear that this practice, long accepted as normal in the Cayman Islands and other offshore jurisdictions, is increasingly unacceptable and that its days are numbered.
Investment communities in both the US and Europe have begun to question whether board directors can possibly perform their duties satisfactorily when they are acting for such a large number of funds.
The rules of the game
Theoretically, the responsibilities are weighty. Being the board member of a hedge fund requires a specific skill set and in-depth experience. As the AIMA Offshore Alternative
Fund Director Guide says: “Any director should have sufficient and relevant knowledge and experience to carry out his duties as director. He should also be able to devote sufficient time to carry out those duties.”
The rules governing who should be a director are not fixed, but the AIMA guide suggests as acceptable “prior experience on fund boards and/or of hedge funds; knowledge of the principles of good governance, of current regulatory issues and of industry trends; an ability to introduce capital; technical knowledge as to the fund’s investment strategy; knowledge of accounting and administration; and knowledge of valuation and instrument types.”
Tax and domicile issues, and how they relate to foreign regulators and markets, also feature prominently, being both complex and critical to the fund’s investment mandate and performance. The directors, in other words, need to be able to make a positive, effective contribution to the fund’s operations. Their responsibilities are real. In particular, the AIMA guide says that ‘trophy’ directors should be avoided; and that directors should proactively prepare for meetings in advance so as to be able to raise any concerns on, for example, risk management issues.
Alric Lindsay, an accredited non-executive director to Cayman Islands-based investment vehicles, says: “In the typical scenario, Cayman resident directors are called upon to sit on the boards of directors of hedge funds that conduct their business in financial markets overseas.”
In practice, these functions are often delegated to service providers, such as administrators or investment managers, who have all the requisite technical skills. This is normal commercial practice, Lindsay says, but “it does not mean that a director can simply forget about the delegation or fail to monitor the same (or the service providers) or absolve himself from all responsibility.”