USS calls for major governance changes at hedge funds

The Universities Superannuation Scheme, one of Britain’s largest investors in hedge funds, is pushing for a significant overhaul of governance in the industry, including giving investors the right to remove managers, elect directors and vote to wind up funds at EGMs.

Luke Dixon, portfolio manager of absolute return strategies at the £32bn scheme, said: “The standard of governance of hedge funds should be improved. Presently, the standard of governance among hedge funds varies and this can expose investors to significant risks.”

He made his wide-ranging comments in a guide published today by the investor steering committee of hedge fund trade body the Alternative Investment Management Association,

Fund investors should have the ability to receive voting shares, giving them the option to “vote on material events or changes in the fund for which shareholder approval should be sought at a general meeting,” Dixon wrote.

Further rights could include appointing investment managers, electing directors and approving their fees, varying shareholder rights and winding up funds at AGMs, or at EGMs investors have convened.

“This is in contrast to the common offshore capital structure wherein effective control of some or all of the above are vested in ‘management shares’, ‘founder shares’, or some equivalent share class, which is typically held directly or indirectly by the investment manager or its founders/partners, and which has no economic interest in the assets of the fund,” Dixon said.

“The establishment of a good fund governance framework ensures that the fund’s investment manager is treated in a similar manner as other service providers to the fund, whilst recognising that the fund exists to provide investors with access to that specific manager’s skill set.”

Dixon said it was poor some funds imposed “unjustified limits on investor redemptions” in the crisis, “and in some cases, those redemption requests have yet to be honoured and filled, more than two years after the crisis abated”.

Other inadequacies he cited included directors failing to review and appropriately approve non-arm’s length dealing between funds and investment managers or sponsoring banks, inadequately clear descriptions of strategy, geographical focus and trading styles of managers.

“Further, investors expect information, including the fund’s financial statements, to be prepared by and delivered to the directors by the fund’s service providers rather than by the investment manager. This reporting distinction explicitly recognises that the service providers are contracted to the fund rather than to the investment manager.”

In addition, Dixon wrote, fund directors should make a final determination on an instrument’s price where dispute arise between a price obtained independently by the fund’s administrator and the value asserted by the investment manager.

Daniel Summerfield, co-head of responsible investment at USS, said: “The standard of governance within the hedge fund industry needs significant improvements and is currently exposing investors to high risks.”

David Walker

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