Best Practices for the Hedge Fund Industry

The ABI’s Response to the Report of the Asset Managers’ Committee of the President’s Working Group on Financial Markets

Introduction

1.  The Association of British Insurers represents the largest single portion of the United Kingdom’s institutional investor base with some £1.3 trillion, equivalent to some $2.5 trillion of assets, under management across all investment categories. Our members have a clear interest in seeing efficient markets and effective investment decision taking whether this be through traditional approaches to investment management or through alternative media such as hedge funds.

2.  We welcome the publication of the two documents by committees of the President’s Working Group on Financial Markets. We respond in a separate memorandum to the other paper.

Comments

3.  The Asset Managers’ Report is a well-constructed document that achieves a good balance between being principles and objectives based and providing a detailed implementation framework. It has a clear focus on matters, such as in the sections on valuation and risk management, that are of central importance to investors.

4.  Reporting to investors is an essential part of the governance process that will be critical to ensuring the effectiveness of the best practice framework. Considered in conjunction with the Report of the Investors’ Committee Report on hedge funds, which has been issued in parallel, there is, we hope, a reasonable likelihood of achieving effective scrutiny of hedge funds and their managers. This is, nevertheless, a challenge.

5.  We note the Report’s recognition of the existence of conflicts, actual and potential, the need for an appropriate separation of functions within management companies, and of the need for an effective culture of compliance and adherence to ethics.

6.  Where the Asset Managers paper is less strong is in how decisions by the asset manager to depart from full adherence to best practice are to be reached, reported on and justified to investors. This is a key component of the governance process by which confidence in the effectiveness of the best practice framework can be ensured.

7.  It is also unclear whether, and if so to what extent, compliance by the hedge fund industry with the framework is to be measured and otherwise assessed. It is unclear to what extent, beyond investor pressure, hedge fund managers will be expected to adhere to the framework and there are risks that managers will seek to use cost or compliance burden as an argument for not signing up. There would be merit in considering how far a “comply or explain” ethos of the kind adopted by the UK’s Hedge Fund Working Group can usefully be employed by the US industry.

8.  We suggest that a commitment to transparency and openness to actual and potential investors be promoted, with the aim of ensuring that investors can achieve a good understanding of whether and how hedge fund managers apply the best practice framework and can make informed choices.

9.  There are wider matters of what might be termed a ‘public interest’ nature but which will still be of relevance to participants as well as investors in hedge funds concerned to ensure a strong reputational standing for the sector. These, including such matters as attitudes to shareholder activism, exercise of shareholder rights and transparency of share ownership, seem to have been regarded as largely outside the scope of the Committee’s deliberations. These are issues that have received more attention in the deliberations of the UK’s Hedge Fund Working Group and which, we suggest, might usefully be kept under review by the Committees of the President’s Working Group.

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