AIMA

The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

Conflicts of interest at the fund level: investor survey shows allocators expect more

By Aymeric Lechartier, Managing Director

Carne

Q4 2013

 

Conflicts of interest continue to rise up the regulatory agenda on both sides of the Atlantic. In the UK, the ‘Dear CEO’ letter published by the then Financial Services Authority in November 2012 drew specific attention to the sometimes inferior management of conflicts of interest at UK-regulated fund management firms. Indeed, the Financial Conduct Authority clearly stated at its Asset Management Conference in London that conflicts would remain on the agenda for scrutiny in 2014.

 

In the US, the SEC has also made it clear that it, too, recognises that conflicts of interest have become an issue. The asset management industry including hedge fund firms have been responding to these demands.

 

In the first half of this year, Carne carried out a survey of major investors, including pension funds, pension consultants, sovereign wealth funds and insurance companies in Europe, North American and Asia Pacific, representing over $9.5 trillion in assets under management, including alternative investments. We wanted to gauge their awareness of conflicts of interest at both the investment manager and fund level, how they saw fund boards playing a role in the management of conflicts, and gain some indication of how they felt a solution might be found.

 

Of the investors interviewed for the study, 90% said they would like fund boards to consider and address conflicts as a matter of routine. They indicated that a majority of independent fund directors on the board and fully independent service providers were the best means of managing conflicts at the fund level [see Figure 1]. Indeed, 83% of those interviewed said they would like to see fund boards with a majority of independent directors, and 62% would like to see boards with an independent chairman.

 

Carne tackling conflict.jpg

 

Investors were asked to define which areas constituted a potential conflict of interest [see Fig 2]. Group-level conflicts emerged as the most likely source of conflicts: at particular risk are funds managed by larger financial organisations like banks, where directors and service providers are often appointed from within the same financial group. Incentive systems and remuneration, principal trades and personal account dealing were also considered open to potential abuse.

 

Carne conflict areas.jpg

 

How to go about managing conflicts at the fund level in the future? The vast majority of investors (95%) approved of a code of fund governance for the asset management industry to adhere to. They were largely against further regulatory intervention, and many of those we spoke to recognised that fund managers were already having to cope with a large regulatory burden. The contents of such a code are covered in Figure 3. One of the biggest concerns remains the lack of independent fund directors on fund boards, and it was suggested by some respondents that there be a formal definition of independence as part of this code to enable effective judgement of whether or not a particular director is sufficiently independent.

 

Carne Suggested contents of industry governance code.jpg

 

Figure 4 illustrates some of the difficulty being faced by investors when assessing whether directors are independent. While the universe was in agreement that employees of the investment manager or its parent group were not sufficiently independent, there still remains some disagreement over directors appointed from the fund administrator. Of enormous importance to investors remains the issue of board transparency – i.e. being able to assess the relationship between the investment manager and independent directors.

 

CarneDo you consider any of the following to be sources of independent directors.jpg

 

When asked to rate the level of governance on a scale of 1 to 10, with 1 being most inferior, a regional breakdown by origin of investment manager shows Asia still trailing substantially. Big strides have been made in fund governance since Carne’s first study on this topic in 2011, but overall satisfaction ratings for both onshore and offshore funds, at 5 to 6, still remain well below the 8 to 9 level funds should aspire to [see Fig 5]. It was interesting to note that US allocators rated US-based managers as having higher levels of governance than non-US investors allocating to US managers.

 

Carne quality of fund level governance.jpg

 

Investors are obviously looking at fund boards as a key platform for protecting their interests as stakeholders. They would like to see established guidelines regarding the management of conflicts of interest and a clear set of factors to help them to identify whether a fund director should be treated as independent. Another solution is to maintain a written conflicts policy at the fund level as well as the investment manager level.

 

The FCA has recognised already that UK investment managers are responding to its ‘Dear CEO’ letter, but conflicts policies should also now be extended to the funds themselves. In this, properly constituted boards, with a majority of independent directors, can play an important role.

 

aymeric.lechartier@carnegroup.com

www.carnegroup.com

 

 

 

 

 

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 Members
    7. Global Partners
    8. FAQs
    9. Opportunities at AIMA
  3. Join AIMA
    1. Benefits of Membership
    2. Membership Fees
    3. Application form
  4. Members
    1. AIMA Annual Reports
    2. AIMA Governance
    3. AIMA Logo
      1. Policy note
    4. AIMA Members' List
    5. AIMA Review of the Year
    6. Committees and Working Groups
    7. Weekly News
    8. Update Profile
  5. Investors
    1. AIMA Investor Services
    2. AIMA Members' List
    3. Investor Steering Committee
    4. Update Profile
  6. Regulation
    1. AIMA's Policy Principles
    2. Asset Management Regulation
      1. EU Asset Management Regulation
        1. AIFMD
        2. European Capital Markets Regulation
        3. MiFID / MiFIR
        4. UCITS
          1. ETFs and Structured UCITS
        5. Venture Capital
        6. Shareholder Rights Directive
      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. Regulation of NBFCs / SIFIS
      6. Supervision
        1. UK regulatory reform
        2. European Supervisory Authorities
        3. US Self-Regulatory Organisations
      7. Remuneration
        1. UK
        2. US
        3. CRD IV and CRR
        4. AIFMD
        5. MiFID
      8. Shadow Banking
      9. Volcker Rule
      10. Other
    3. Markets Regulation
      1. Bank/Capital Regulation
        1. Capital Requirements Directive
        2. EU Bank Structural Reforms
      2. Derivatives/Clearing
        1. EMIR
        2. MiFID / MiFIR
        3. MAD / MAR
        4. Dodd-Frank Act Title VII
        5. Hong Kong
        6. IOSCO
        7. Singapore
      3. High Frequency Trading
        1. ESMA Guidelines
        2. MiFID / MiFIR
        3. MAD / MAR
        4. Flash Crash
        5. IOSCO
        6. Germany
        7. CFTC Automated Trading
      4. Insurance Regulation
        1. Solvency II
      5. Market Abuse
        1. MAD / MAR
        2. Indices as Benchmarks
      6. Position Limits
        1. MiFID / MiFIR
        2. CFTC Position Limits
      7. 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
      8. Short Selling
        1. EU Short Selling Regulation
        2. Hong Kong Short Selling Regulation
        3. US Short Selling Regulation
        4. Short Selling Bans
      9. Securities Settlement
      10. Shadow Banking
        1. International Shadow Banking
        2. EU Shadow Banking
      11. Trading
        1. MiFID / MiFIR
        2. Dodd-Frank Act
    4. Tax Affairs
      1. EU Savings Directive
      2. FAIFs and FINROFs
      3. FATCA
      4. FIN 48 and IAS 12
      5. Financial Transaction Tax
      6. Investment Manager Exemption
      7. UK Offshore Funds Regime
      8. Other
    5. Search
    6. Resources
      1. Guidance Notes
      2. Jurisdictional Guides
      3. Noticeboard
        1. BEPS
        2. Dealing Commission
        3. Derivatives
        4. FATCA
        5. FTT
        6. High Frequency Trading
        7. MiFID / MiFIR
        8. Other Hot Asset Management Topics
        9. Other Hot Markets Topics
        10. Position Limits
        11. Trading
        12. UK Partnership Tax Review
        13. 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. AIMA Journal
      1. Recent issues
      2. Search AIMA Journal articles
      3. AIMA Journal Archive
    2. The Extra Mile: Partnerships between Hedge Funds and Investors
    3. 'Apples and apples' - How to better understand hedge fund performance
    4. AIMA/KPMG reports on state of global hedge fund industry
    5. Roadmap to Hedge Funds
    6. ‘Capital Markets and Economic Growth – Long-Term Trends and Policy Challenges'
    7. Guides for institutional investment
    8. Industry-standard DDQs
    9. Sound Practices
    10. Industry Guides
    11. CAIA
      1. FAI
    12. 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
    13. Services to Start-up Managers
    14. Useful Websites
    15. 'The Alternative Answer'
    16. Glossary
    17. AIMA's Investor Steering Committee Paper
  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 Contacts
    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