By Charlotte Valeur
Governance and transparency in the hedge fund sector is an increasing area of interest especially for investors but also for regulators and service providers. As the hedge fund landscape changed to be dominated by large institutional investors the requirements for more transparency in all areas also increased. 2008 onwards made it clearer that if the industry had had a generally higher level of good corporate governance some of the issues the investors faced could possibly have been less.
Transparency is improving within the hedge fund industry but it is moving very slowly. The largest institutional investors especially in Europe and the US are pushing for changes and some are very outspoken about the changes they would like to see in especially the area of governance. I think this is fully justified and changes are long overdue. Being the chairman of the listed Brevan Howard Credit Catalyst fund and on the board of other listed companies I have grown to feel that there is little reason why unlisted funds should not provide similar transparency as a listed fund.
Looking at annual reports of listed funds they generally contain a chairman’s statement, the financials, reporting on corporate governance and a report from the investment manager on the investments. Considering that unlisted funds hold considerably more capital than listed funds do one has to wonder why investors so far has been content with less transparency?
Historically hedge funds were investment managers keeping very much below the radar of the public. With the growing investments from large institutions the requirements from investors has changed dramatically. I believe this is for the better of the industry as a whole and the increased and new regulations are also changing the landscape for investment funds and their governance.
So what level of governance transparency is useful for an investor of a fund they are invested in and why?
The funds should in the prospectus provide more information about the board composition and the individual directors. What is the percentage of independent directors? What is the experience and background of each director? What is the age and gender of each director? Do any of the directors have any conflict of interest with the investment manager/the fund investments/ fund service providers?
Currently, generally the board of an unlisted fund is put together by the investment manager. Having this information is a valuable insight into what kind of board he/she would like to have. Is he/she looking for control? If yes why?
Conflict of interest and independence are important to look closely at and areas which should be much more transparent. It is important for investors to know exactly how a director is or has been connected to the investment manager or the fund. A simple biography reveals very little.
Secondly, I think there should be transparency of how many directorships each director has and if they have a full time job as well to ascertain if they have enough time to commit to this role.
Thirdly, I think the prospectus should clarify more specifically how many board meetings will be held, where and if they will aim for them to be in person. I have come across funds who had one board meeting a year over the phone. And finally the investors should have insight into what will be discussed at the board meetings in general and an assurance that adequate D&O insurance is in place.
Once the fund is launched I would recommend for the board to send an annual letter to the investors outlining the meetings they have had during the year, where and who attended. Also outline what the role of the board is and what processes they have in place to fulfill their fiduciary responsibilities.
If the level of governance transparency in the alternative fund world would rise to this level I think the industry would benefit a lot going forward.
Charlotte Valeur is chair of BH Credit Catalysts
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