10/23/2013 07:09:23 AM

Investors Demand Better Governance from Hedge Funds and Alternatives

Research from Carne Group finds 95% of investors want a global code of governance to be introduced.

(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 complained.

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 on governance.”

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.

Related Content: UK Pension Funds Launch Governance Index and Problems with Rules & Regulations  

Contact the writer of this story:Charlie ThomasCharlie ThomasAssistant European Editor, aiCIO(44) 207 397 3827cthomas@assetinternational.comFollow on Twitter at @ai_CIO