(October 23, 2013) – Hedge funds and alternatives are
suffering from a lack of experienced and independent directors on their boards,
leading to an industry-wide failing on fund governance, investors have
Pension funds, consultants, fund of funds, private banks,
and sovereign wealth funds were quizzed by independent fund governance provider
Carne Group on issues of conflicts of interest at long only and alternative
funds. The results showed an alarming lack of trust in these fund managers to
manage conflicts well.
Some 95% of investors would welcome an industry-generated
code of conduct, rather than further regulation, to combat the governance
issues, and 83% want fund boards to have a majority of independent directors on
them. In addition, 62% want the chairman to be independent.
Investors believe each fund board should have at least three
directors, and that two-thirds of them should be independent. Investors claimed
there was also a dramatic need for greater levels of transparency between the
investment manager and independent directors.
Another key development in the 2013 survey was that for the
first time, a risk management background was considered the most sought after
professional skill for independent fund directors, above the previous top entry
of having a legal background.
“Fund governance has
continued to grow in importance since the 2008 financial crisis. While for some
investors it has always been an issue, the bulk of asset allocators are now
much more focussed on the issue,” the report said.
“One of the contributors to the survey described it as ‘an
undiversifiable risk factor’… Increased volatility in the markets and enhanced
complexity of governance as a legal and regulatory issue are also important
factors causing institutional investors and consultants to focus more attention
The fund managers believed to have the best quality
governance were from the UK, followed by Continental Europe, with the North
American market ranking third. Even then, the UK fund managers only scored a
6.8 out of a possible 10, whole Continental Europe managed 5.8, and the North
American market just 5.6.
Investors believed the conflicts of interest most likely to
take place were at a group level, such as the appointment of service providers
for a fund from within the same financial group. They are also concerned about
trading errors being identified and reported to fund boards correctly, and how
investment and other guideline breaches by the investment manager were handled.
The report concluded by offering four key steps to improve
governance at the fund board level. They are:
1) To appoint fund boards where the majority of directors
are independent and can be clearly identified as such;
2) Ensuring there are four board meetings per year, at least
two of which are in person;
3) To appoint independent directors with at least 10 years
of industry experience and;
4) To demonstrate awareness of conflicts at a fund and
investment manager level with a written conflicts policy.
The full report is expected to be published online in the
next few weeks.
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