Survey: Cayman hedge fund governance is found wanting

A survey of hedge fund allocators by fund governance service provider Carne found that 63 per cent were unhappy with the level of fund governance in the Cayman Islands.  

Many of the respondents who said they were satisfied with fund governance in Cayman indicated in interviews that this was only the case because they carried out additional due diligence and continuous oversight themselves, the report “Corporate governance in hedge funds: Investor survey 2011” noted. 

Commenting on the results John Ackerly, director of Carne Cayman, said “the report highlights the expectations of the investor community and we believe sends a clear message as to the prevailing attitudes of the institutional allocator. 

“Cayman is generally acknowledged as the leading jurisdiction for the domiciliation of offshore hedge funds and what the survey does is allow us to better understand the standards by which we will be measured,” he said. 

By contrast the survey results showed that fund allocators appeared very satisfied with fund governance in both Luxembourg and Ireland (80 and 84 per cent respectively). Satisfaction with the Channel Islands was mixed. 

“The allocators’ more positive opinions of governance in other jurisdictions, we believe, is a result of the regulatory requirements imposed on funds in those domiciles,” Mr. Ackerly said. “The satisfaction levels with Dublin and Luxembourg are a target for those of us in Cayman to aim for through the consistent application of quality corporate governance practices. We should remember that the absence of a requirement in the regulatory structure for robust governance should not excuse one from imposing 
best practice,” he said. 

Unsurprisingly, almost all allocators want to see higher standards of corporate governance in the hedge funds industry and 91 per cent of respondents said that poor governance would prevent them from investing in a fund, even if the fund met other operational and performance criteria. 76 per cent said they had, in the past, decided against investing in a fund because of governance concerns. 

Overall, just over half of the investors surveyed said current levels of fund governance were acceptable but needed improvement, and 47 per cent said standards were below the desired levels. 

 

Main concerns  

The main concern of investors, according to the survey, is that independent directors serving on a fund’s board have too many directorships (89 per cent). This is followed by a lack of independent directors (80 per cent) and the lack of experience and knowledge of directors (74 per cent). 

According to the report, many allocators demand that directors should be playing a more active role in representing their interest rather than delegating everything to the investment manager without proper supervision.  

Carne quoted a respondent from Mesirow Advanced Strategies as saying: “In a non-operating company like a hedge fund, that exists solely to invest the capital of investors, the company and the shareholders are alter egos. There is no interest in the company separate from the interest of investors…The directors need to be active in finding out what investors want, not accepting what the manager says.”  

Other important areas of concern for allocators are the composition of the board, in particular the number of directors and independent directors and their relative independence. In this context defining independence and identifying conflicts of interest of directors is a key issue for investors. This becomes more important the fewer directors there are on a board, the report stated. 

 

Difficulties  

Allocators said they had experienced difficulties when seeking governance related information, including how many directorships were held by the directors of the fund they invested in (83 per cent), as well as board meeting agendas and information on board proceedings (55 per cent).  

The majority of allocators (58 per cent) said they would prefer to limit  

to a maximum of 30 the number of directorships that an independent director can hold, so that the quality of oversight is not impacted.  

In addition, the majority of respondents said they would want to see full board meeting four times per year, with two of the meetings held in person. Some allocators noted that certain strategies, such as complex credit funds, required more oversight than others, the report said. 

The survey also revealed a bias (66 per cent) toward larger boards with the majority of investors looking for at least three directors on the board of a fund. 

The increased focus on the quality of governance on hedge fund boards comes as a direct result of higher levels of institutional investment in hedge funds together with the higher governance standards that they require since the financial crisis, Carne said. 

The survey report is based on the responses of 50 allocators who represent in excess of $600 billion in hedge fund assets under management or about one third of the hedge fund universe. 

John Ackerly

Mr. Ackerly
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