Carne finds investors demand better governance from hedge funds
A key factor in the performance of an offshore hedge fund is the independent director, whose duty is to defend the interests of the investor.
Hedge funds have just posted the fourth worst quarterly performance in industry history, no doubt causing many investors to rethink their investments in the sector.
But if investors do decide to redeem, it could be for reasons other than poor performance.
One possible reason is concern about governance. In a recent survey of allocators to the hedge fund sector, 80% of respondents said they have had reason to withdraw from a hedge fund investment on grounds of concern over the fund’s governance.
The survey by the Carne Group found that for the vast majority of allocators (91%), poor governance would cause them to avoid investing in a fund, even if it met other operational and performance criteria.
Of the allocators canvassed for this research, who together represent more than $600bn in allocations to hedge funds, 76% have decided against investing on at least one occasion due to governance concerns.
Daniel Summerfield, co-head of responsible investment at USS, the second largest private sector pension scheme in UK with more than £32bn of assets (as of 31 March), is typical of the allocator with the power to force changes in the traditionally opaque world of offshore hedge funds.
He says: “The standard of governance within the hedge fund industry needs significant improvements. It is currently exposing investors to high risks. One critical factor, which is often overlooked, is the role, responsibilities and quality of independent directors.”
The past decade has seen the offshore hedge fund industry go through a period of progressive “institutionalisation”, lured by the prospect of managing the assets of the big allocators, such as the USS and CalPERS, the $234bn California pension fund.
But offshore hedge funds still have a long way to go to bring their standards of governance to an acceptable level.
Making things clear
Todd Groome, chief executive of AIMA, the UK’s alternative investment management association, notes an increased number of non-trading professionals employed by hedge funds, as well as a greater focus on operational or back office systems, compliance and performance and risk reporting.
The reason, he wrote in AIMA’s Guide to Institutional Investors’ Views and Preferences Regarding Hedge Fund Operational Infrastructures, is clear:
“These increased operational infrastructures are visible among managers of all strategies and sizes.
“From the large and established firms to much smaller, even start-up managers, a more sophisticated operational framework is required to attract institutional investor capital.”
The presence of good governance is essential in terms of both crisis mitigation and in the event that a hedge fund encounters a problem that requires a resolution.