The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

Fund corporate governance

By John McCann, Managing Director

Trinity Fund Administration Limited

Q3 2012

Q3 edition



Awareness of the importance of fund governance has been gaining ground since the commencement of the financial crisis in 2008. While overall responsibility for good corporate governance lies with the board of directors, promoters also have a major role to play. Fund governance comprises systems which enable the proper control and direction of a fund and in particular the supervision of delegates. 

The Board of Directors is required to act in the best interests of the fund, which usually means the fund’s investors, but can also apply to other stakeholders, including creditors. It is important to ensure that sufficient numbers of the directors are independent, which is characterised by the lack of any links to companies in which the fund invests, or to significant service providers to the fund. A director, while acting on the board should declare any conflicts and act independently. Preferably he or she should have a verifiable track record in the investment management industry.

While corporate governance remains within the official remit of the directors, an emerging trend is that more parties are becoming directly concerned with and involved in the good governance of a fund. Investors, risk management teams, service providers and regulators are all taking a greater interest in how a fund exercises proper control and direction.

Onshore versus offshore

A watershed case for many professionals in the fund industry was the Cayman Islands Weavering case, (Weavering Macro Fixed Income Fund Limited (in liquidation) v. Stefan Peterson and Hans Ekstrom, Grand Court of the Cayman Islands Financial Services Division - FSD113 of 2012 AJJ), where directors of the Weavering Macro Fixed Income Fund were found to be personally liable for redemption excesses of $111m due to inflated net asset values of the fund. This case highlighted the high level of responsibility of each director of a fund and the importance of ensuring that each director carries out his or her myriad fiduciary, common law and company law duties properly.  Cases, such as this, have driven investors to demand greater due diligence, as well as opening up a re-evaluation of how onshore and offshore funds are governed.

As discussed at the Regulatory Compliance Association symposium held in April 2012 in New York, there is often ambiguity regarding whether United States onshore domestic funds possess the same level of governance as offshore funds. The importance of board oversight is even more pronounced where onshore and offshore funds are managed side by side for example in a master-feeder structure, where the master fund is Cayman domiciled.

US onshore funds can use advisory boards rather than boards of directors if they have been established as limited liability companies or limited partnerships. This anomaly in corporate governance of onshore and offshore funds requires a robust code of good corporate governance which facilitates regulatory compliance and risk management in both the onshore and offshore entities, in order to protect the interests of the investors and other stakeholders.

U.S. advisory boards are typically composed of investors, third parties or ex- regulators, thus they often possess a high degree of expertise, however they do not carry the same fiduciary obligations as a board of directors. They are useful in terms of demonstrating commitment to independent oversight however.

Code of good corporate governance

Robust corporate governance procedures should clearly lay out the board’s terms of reference, the responsibilities of the directors, as well as the requirements for the appointment of a director, such as experience and independence. The code should include details of board meetings; how often they will take place, who should and should not attend, what should be covered in each meeting, the reporting requirements for delegates, as well as confidentiality requirements for material covered.

Some further items which need to be considered are potential conflicts of interest which may arise, operational activities including bank account opening and cross trades management, investor reporting and the fund’s valuation policy. The last point is an item which is garnering particular attention due to cases such as Weavering.

Ireland has implemented a new Corporate Governance Code for collective investment schemes and management companies domiciled in Ireland. This code states certain minimum requirements to ensure strong corporate governance which facilitates effective oversight of activities, considering the nature, scale, complexity and any outsourcing arrangements. Although voluntary, it is strongly recommended by the Irish Central Bank that this code be adopted, and companies will be expected to produce a valid reason for why they could not comply at the end of the transitional period in December 2012.

Risk management

Risk management is one of the main mechanisms used to protect the interests of a fund and its stakeholders. In terms of corporate governance, the board of directors must oversee the fund’s risk management policies and procedures, which can be outsourced to third parties, including the fund administrator.

Third party providers, such as fund administrators, are growing increasingly useful in the risk management arena. Managing counterparty exposure risk is achieved by diversifying beyond a single service provider (e.g. brokers) and is further enhanced by a service provider who works at arm’s length, providing an additional layer of scrutiny. In much the same way as an experienced, independent director adds legitimacy to a board of directors, an experienced, independent service provider can add legitimacy to the robustness of a fund’s risk management procedures. 

Risk management is strengthened through certain other operating procedures to which a third party administrator contributes, such as three way reconciliations whereby the daily trades are reconciled by three separate parties; the manager, the prime broker and the administrator. This can be extremely effective in reducing the risk of an error in the fund’s accounts.

There are several ways in which a fund’s approach to corporate governance can protect its investors and ensure that the fund is compliant with relevant regulations. As several related issues have shown, (Weavering, Maddoff, Dynamic Decisions Capital) the most important mistake to avoid is complacency.

If the fund’s board of directors remain vigilant and meet regularly and the fund’s corporate governance is robust enough to facilitate sufficient control and direction, the fund should remain properly governed.



Back to Listing

Main Menu

  1. Home
  2. About
    1. Our Core Objectives
    2. AIMA's Policy Principles
    3. Meet the team
    4. AIMA Council
    5. Global Network
    6. Sponsoring Partners
    7. Opportunities at AIMA
    8. AIMA’s 25th anniversary in 2015
  3. Join AIMA
    1. Benefits of Membership
    2. Membership Fees
    3. Application form
  4. Members
    1. AIMA DDQs
    2. AIMA Annual Reports
    3. AIMA Governance
    4. AIMA Logo
      1. Policy note
    5. AIMA Members' List
    6. AIMA Review of the Year
    7. Committees and Working Groups
    8. Weekly News
    9. Update Profile
  5. Investors
    1. AIMA Investor Services
    2. AIMA Members' List
    3. Investor Steering Committee
  6. Regulation
    1. Asset Management Regulation
      1. EU Asset Management Regulation
        1. AIFMD
        2. European Capital Markets Regulation
        3. MiFID / MiFIR
        4. UCITS
        5. European Venture Capital Directive
        6. Shareholder Rights Directive
        7. European Long Term Investment Fund Regulation
        8. Loan Origination Funds
        9. Capital Raising
        10. AIFMD-Related Events
      2. US Hedge Fund Adviser Regulations
        1. Registration and Reporting
        2. Incentive-Based Compensation
        3. JOBS Act
      3. Asia Pacific Asset Management regulation
      4. Other Jurisdictions’ Asset Management Regulation
      5. Private Placement Regime
        1. Canada
        2. Dubai
        3. Finland
        4. Germany
        5. Hong Kong
        6. Japan
        7. Saudi Arabia
        8. Sweden
        9. United Arab Emirates
      6. Systemically Important Financial Institutions ('SIFIs')
      7. Remuneration
        1. UK
        2. United States
        3. CRD IV and CRR
        4. AIFMD
        5. MiFID
      8. Shadow Banking
      9. Volcker Rule
      10. Other
      11. Systemic Risk Reporting
      12. Dealing Commission
      13. Corporate Governance
      14. Securitisation
    2. Markets Regulation
      1. Bank/Capital Regulation
        1. Capital Requirements Directive
        2. EU Bank Structural Reforms
      2. Capital Markets Union
      3. Derivatives/Clearing
        1. EMIR
        2. MiFID II / MiFIR - Derivatives
        3. MAD / MAR
        4. Dodd-Frank Act Title VII
        5. Hong Kong
        6. IOSCO
        7. Singapore
      4. High Frequency Trading
        1. EU automated trading
          1. ESMA Guidelines
          2. Germany
          3. MiFID II / MiFIR - HFT
        2. US automated trading
          1. SEC Regulation SCI
          2. CFTC Automated Trading
        3. IOSCO
        4. Flash Crash
      5. Insurance Regulation
        1. Solvency II
      6. Market Abuse
        1. MAD / MAR
        2. Indices as Benchmarks
      7. Position Limits
        1. MiFID II - Commodities
        2. CFTC Position Limits
      8. Resolution of Financial Institutions
        1. Europe
          1. EU Bank Recovery and Resolution Directive
          2. EU Non-Bank Recovery and Resolution
        2. CPSS-IOSCO
        3. Financial Stability Board
        4. UK
        5. USA
      9. Shadow Banking
        1. International Shadow Banking
        2. EU Shadow Banking
      10. Short Selling
        1. EU Short Selling Regulation
        2. Hong Kong Short Selling Regulation
        3. US Short Selling Regulation
        4. Securities Settlement
      11. Trading
        1. Dodd-Frank Act
        2. MiFID Portal
    3. Tax Affairs
      1. Automatic Exchange of Information (AEOI)
        1. FATCA
        2. EU - AEFI
        3. OECD - Global Standard on AEFI
      2. Australia - Investment Manager Regime (IMR)
      3. Base Erosion - Profit Shifting (BEPS)
      4. FAIFs and FINROFs
      5. FIN 48 and IAS 12
      6. Financial Transaction Tax (FTT)
      7. UK Investment Management Exemption (IME)
      8. UK Offshore Funds Regime
      9. Other
    4. AIMA's Policy Principles
    5. Search
    6. Resources
      1. Guidance Notes
      2. Jurisdictional Guides
      3. Noticeboard
        1. AEOI: FATCA and other regimes
        2. AIFMD
        3. Bank/Capital Regulation (including NSFR)
        4. BEPS
        5. CFTC Registration and Exemptions
        6. Corporate Governance
        7. Dealing Commission
        8. Derivatives
        9. FTT
        10. High Frequency Trading
        11. MiFID / MiFIR
        12. Other Hot Asset Management Topics
        13. Other Hot Markets Topics
        14. Other Hot Tax Topics
        15. Position Limits
        16. Trading
        17. UCITS
        18. UK Partnership Tax Review
        19. US State and Local Taxes
        20. Volcker Rule
      4. Hedge Fund Manager Training
      5. Quarterly Regulatory Update
      6. Webinar Programme
      7. Regulatory Compliance Association
        1. About the Regulatory Compliance Association
        2. RCA Curricula and initiatives for alternative investment firms
        3. Meet the regulators and Sr. Fellows
  7. Education
    1. Research
      1. AIMA Research
      2. Industry research
      3. Search research documents
    2. "The Case for Hedge Funds"
      1. Global Hedge Fund Industry Paper: The value of our industry
      2. The Value of the Hedge Fund Industry to Investors, Markets and the Broader Economy: Research commissioned by AIMA and KPMG
      3. The Evolution of an Industry: KPMG/AIMA Global Hedge Fund Survey
      4. Contributing to Communities: A global review of charitable and philanthropic activities by the hedge fund industry
      5. Beyond 60-40: The evolving role of hedge funds in institutional investor portfolios
      6. The Cost of Compliance: Global hedge fund survey by AIMA, MFA and KPMG
      7. Capital Markets and Economic Growth: Long-term trends and policy challenges
      8. Apples and Apples: How to better understand hedge fund performance
      9. The Extra Mile: Partnerships between hedge funds and investors
      10. Key articles by AIMA on the case for hedge funds
    3. AIMA Journal
      1. Recent issues
      2. Search AIMA Journal articles
      3. AIMA Journal Archive
    4. AIMA Guides to Sound Practices
    5. AIMA guides for institutional investors
    6. CAIA Association pages
      1. Fundamentals of Alternative Investments
    7. Regulatory Compliance Association pages
      1. About the Regulatory Compliance Association
      2. RCA Curricula and initiatives for alternative investment firms
      3. Meet the regulators and Sr. Fellows
    8. Certified Investment Fund Director programme
    9. Services to Start-up Managers
    10. Glossary
  8. Events
    1. AIMA Events
    2. AIMA webinars
    3. Industry events
  9. Media
    1. Press Releases & Statements
    2. AIMA's blog
    3. Media Coverage
      1. Articles by AIMA
        1. Archive
      2. AIMA in the news
      3. Video interviews
      4. Industry news
    4. Media Contact
    5. Press Materials

Sub Menu

  1. Education
    1. AIMA Journal
    2. Bibliography
    3. CAIA Designation
    4. Research
    5. Roadmap to Hedge Funds
    6. AIMA's Investor Steering Committee Paper
    7. Glossary
  2. Regulatory, Tax, Policy & Government Affairs
    1. AIMA Position Papers
    2. AIMA Responses
      1. Australian Tax Office
      2. Authority for the Financial Markets
      3. Committee of European Banking Supervisors
      4. Committee of European Securities Regulators
      5. Commodity Futures Trading Commission
      6. Dubai Financial Services Authority
      7. European Commission
      8. European Securities and Markets Authority
      9. Swiss Financial Market Supervisory Authority
      10. Financial Services Authority (UK)
      11. Financial Services and the Treasury Bureau
      12. Guernsey Financial Services Commission
      13. HM Revenue & Customs
      14. HM Treasury
      15. Independent Commission on Banking
      16. IOSCO
      17. Monetary Authority of Singapore
      18. Securities and Exchange Board of India
      19. Securities and Exchange Commission (USA)
      20. Securities and Futures Commission
      21. Singapore Exchange
      22. The Takeover Panel
      23. US House of Representatives / Senate
      24. Federal Deposit Insurance Corporation
      25. Financial Stability Oversight Council
      26. Financial Stability Board
      27. US Treasury
      28. Internal Revenue Service
      29. US Federal Reserve
      30. Financial Industry Regulatory Authority (FINRA)
      31. Council of European Union
      32. Hong Kong Exchanges and Clearing
      33. House of Lords
    3. AIMA Summaries
      1. CESR
      2. European Commission
      3. Financial Services Authority (UK)
      4. HM Revenue & Customs
      5. HM Treasury
      6. IOSCO
      7. Securities and Exchanges Commission
      8. FSOC
      9. CFTC
    4. Guidance Notes
    5. Jurisdictional Resource
    6. AIMA Noticeboard
      1. EU Directive on Alternative Investment Fund Managers
      2. FSA Remuneration Code
      3. Short Selling
      4. US Dodd-Frank Wall Street Reform and Consumer Protection Act
      5. UK Stewardship Code
      6. Securities Law Directive
      7. EU Directive on Alternative Investment Fund Managers - Level II
      8. EU Directive on Markets in Financial Instruments (MiFID)
      9. International Financial Centres
      10. Bribery Act
      11. Market Abuse Directive
      12. MF Global
      13. FATCA
      14. FTT
      15. Other Tax Issues
    7. AIMA Regulatory Update
  3. Sound Practices
    1. Due Diligence Questionnaires
    2. Guides to Sound Practices
  4. Start-Up Service Providers
  5. Useful Websites