Progress report
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20/04/2011
Comment: Kevin Ryan
HFMWeek has recently reported on a series of letters written by large hedge fund investors to the Cayman Islands Monetary Authority (Cima) demanding more information on hedge fund directors. In particular, Cima is being asked to open up a database revealing all the directorship roles held by locals. It will be interesting to see what comes to light once this information is provided.
Historically, for various reasons, there has been a tendency to treat offshore hedge fund directorships as a largely secretarial role. Investors haven’t expected a high standard of offshore governance and the industry hasn’t delivered it. There have been no rules on the maximum numbers of board seats, which some have seen as permission to collect as many directorships as they possibly can. Until Cima opens its books, precise information is hard to come by, but there are reports of Cayman directors who are on the boards of 200, 300 and even 500 funds. At least one individual is said to be on the boards of over 1,000 hedge funds.
Investors have become almost conditioned into viewing these numbers with resignation or even apathy, but for industry outsiders, these figures boggle the mind. There is no other field of investment where such numbers would be acceptable. A very real duty of care is owed by directors to shareholders; in the case of pension fund investors, this duty is owed on people’s life savings. As institutional investors increasingly dominate the hedge fund space, these huge directorship portfolios simply fail to meet their requirements of ‘best practice’.
The reason investors have been forced to turn to Cima to open their database is that the directors themselves often refuse to disclose the details of the directorships they currently hold, or have previously held. Even the number of directorships held is often deemed to be too confidential to disclose. When pressed on why, the response is typically a vague comment about privacy concerns and conflicts of interest.
Greg Robbins, general counsel at Mesirow, has been quoted as saying that new Cima regulation on this issue isn’t necessary: “The goal is just to make the information available and then let the market decide”. Robbins is correct; investors are perfectly capable of making sensible governance decisions, provided that Cima allows them access to the information that, by rights, should already be in their possession.
An important point, however, is that the investors themselves are not blameless victims. Directorship fees have too often been a ‘race to the bottom’, as start-up hedge funds have sought to minimise costs and investors have been happy to accept directors being paid as little as $2,000 per annum. At these fee levels, investors can then hardly feel surprised when the service they get is less than 100% and the directors start taking on a large portfolio of roles. Investors too need to re-think their expectations and priorities.
Cima, to its credit, appears to be realising that the current situation is untenable. Institutional investors are bound by governance codes and simply cannot hire directors with undisclosed workloads to provide oversight to their end-investors. As the AIFM Directive comes into effect and other jurisdictions raise their standards, the Cayman Islands needs to convince the global investment community that it remains a credible and professional place to do business.
Cima is reported to be ‘information gathering’ at this stage, a process which really shouldn’t need to take long. The Cayman Islands is a small place and local relationships are important, but this issue isn’t going away. The time has come for the island regulator to assert its authority and do the right thing by investors.
Kevin Ryan is the founder of HedgeDirector, a specialist provider of independent directors.
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I have worked in public accounting and hedge funds and in the past eight years have been selling middle- and back-office services to the alternate investment industry. My role is to build relationships with clients, teach them about SS&C’s products and services, and ensure seamless transactions every time the firm launches a new fund.
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Comments (1)
Chris Johnson 20/04/2011 10:37pm
Not revealing directors' names of Hedge Funds is just part of the problem. What about banks and insurance companies? But why stop there? It is totally unacceptable that the names of directors of all companies are not a matter of public record. Similarly Memorandum and Articles of Association are not a matter of public record in the Cayman Islands. However by far the largest problem is that these directors are more often than not, indemnified under the company's articles for almost everthing except fraud. Such acts have been banned in many countries, Guernsey being one comparatively recently. It cannot be a matter of public interest to allow this shocking practice to continue. In the matter of a liquidation the liquidators are unable to sue directors yet they may sue third party advisors. This is cannot be right. Cayman directors, particularly of Hedge Funds need enter the bigger world. CIMA please listen to stakeholders and not greedy directors.
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