Hedge fund body toughens governance stance
A global body representing hedge funds is putting pressure on the industry to raise its corporate governance standards and employ independent administrators after apparent lax efforts led to many firms and their investors being duped by convicted fraudster Bernard Madoff.
The Hedge Fund Standards Board is consulting its members on changes to its voluntary code of practice that will compel managers to enlist independent administrators - or explain to investors why they did not.
Previously, the body went so far as recommending managers use third parties to check on assets in, and performance from, hedge funds.
The HFSB has also said hedge fund assets should be held by independent custodians, and managers should tell investors the criteria by which redemptions from portfolios could be curbed.
Antonio Borges, the board's chairman, said: "The HFSB standards would already make it very difficult for a Madoff-type scandal to occur, but we believe it is right to raise the bar higher."
Hedge funds are under unprecedented pressure to engage third parties to verify what managers say is true. Apart from an external auditor for his stock broking business, Madfoff had few such checks and balances.
Large US hedge funds Caxton Associates and Millennium Partners have recently enlisted independent administrators, and investors such as UBP and RMF have demanded it. The European Commission, meanwhile, is angling at mandating the practice.
Jack Klinck, global head of State Street’s alternative investment solutions team, said: "Having more disclosures to investors, and outsourcing administration are all steps that help the industry regain trust."
The HFSB will also require its members, including 12 new ones it said recently became signatories, to spell out the basis on which they might restrict withdrawals.
More than 100 European funds curbed redemptions in the final quarter of last year, many unexpectedly.
Emily Porter, portfolio manager at the Universities Superannuation Scheme, said the £23bn (€27bn) pension fund would focus on issues such as this as it invests about 20% of its assets in hedge funds over the coming two years. "Gating could be a black mark against a manager," she said.
Morten Spenner, chief executive of fund of funds International Asset Management, said IAM could invest into funds that had curbed withdrawals in the past, if it felt the manager was justified in having done so, but it would not commit money until all previous redemption requests had been met.
--write to dwalker@efinancialnews.com
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