EUROPE - Governance has become a crucial element in the investment decision-making process of hedge funds, according to the UK's £32bn (€36.6bn) Universities Superannuation Scheme (USS).
In the opening chapter to a guide to investor preferences published by the Alternative Investment Management Association (AIMA), the global hedge fund association, Luke Dixon, portfolio manager of absolute return strategies at USS, writes: "The financial crisis of 2008 uncovered poor governance practices among many hedge funds, which, for example, used force majeure considerations to impose unjustified limits on investor redemptions. In some cases, those redemption requests have yet to be honoured and filled, more than two years after the crisis abated."
Dixon outlines the expectations of institutional investors with reference to the importance of good governance, key constitutional documents and the role of boards of directors at hedge funds due to the fact constitutional documents are frequently drafted with a strong bias toward the interests of the investment manager or adviser, while offering few rights or protections to investors.
He point out that conflicts of interest frequently exist between the hedge fund's board of directors, investment managers and the fund's advisers.
"This has led to the conclusion that the standard of governance of hedge funds should be improved," he says. "Investors recommend that governance structures and oversight responsibilities should be in place to protect them and would want all oversight responsibilities to be undertaken by responsible, knowledgeable and independent fiduciaries."
Mike Powell, head of alternatives at USS, said: "Good governance is a core principle of USS's hedge fund programme. This publication represents a practical guide to how hedge fund managers can implement good governance while simultaneously providing investors with an invaluable benchmarking tool to assist in their due diligence."
The publication, 'A Guide to Institutional Investors' Views and Preferences Regarding Hedge Fund Operational Infrastructures", consists of contributions from members of AIMA's steering and research committees, including viewpoints from the California Public Employees Retirement Scheme and British Airways Pension Investment Management.
Its aim is to look into the operational and organisational issues that are increasingly the focus of due diligence reviews.