Progress report
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05/10/2011
Comment: Julian Korek
JULIAN KOREK is a founding member of Kinetic Partners
On 26 August 2011, the Financial Services Division of the Grand Court of Cayman concluded on the case of Weavering Macro Fixed Income Fund Limited (in Liquidation) v Stefan Peterson and Hans Ekstrom. It found the two non-executive directors to be subject to wilful neglect in the discharge of their duties. The court charged $111m to be paid in damages to the fund’s liquidators, reflecting the losses suffered by the fund as a result of their default.
This was a unique case in Cayman in the context of a failed investment fund, and has raised important questions about the structure and directorship of Cayman Islands investment funds. This was underlined in Mr Justice Andrew J Jones’s judgement on the case, during which he reiterated hedge fund directors’ duties.
Crucially, the independent non-executive directors must hold a high-level supervisory function over the investment management, administrators and accounting functions who are acting as the fund’s professional service providers. In this case, the directors were not proactive in their oversight of the service providers and only ‘dealt’ with issues that were brought to their attention.
Further still, regular board meetings should be organised to discuss business matters and the directors should be properly qualified to review a balance sheet and the fund’s management accounts, as well as have sufficient industry and product knowledge, in order to understand its financial and Nav position.
Significant case law already exists on trading company directors’ duties; however this is the first time that the Cayman court has concluded on a case specifically relating to hedge fund directors’ duties. The outcome of this case is likely to become an influential judgement on the subject.
The Hedge Fund Standards Board provides standards relating to hedge fund practices. However, there is little guidance on directors’ duties and it appears that most of the responsibility for establishing good governance falls on fund managers.
Perhaps industry participants should consider upgrading the current practices adopted by hedge funds to an improved framework, such as that adopted by UK SPLIT Capital Investment Trusts since its similar debacle in the late 1990s that led to some significant collapses and up to £600m of investors’ monies lost.
In 2001, the FSA initiated a number of discussion papers on the regulation of SPLITs. Since then, the FSA has proposed a series of new listing and business conduct rules that apply to all investment trusts. These included enhanced disclosure requirements, ensuring the independence of the trusts from their investment managers and clarity on directors’ duties.
In particular, Sir Derek Higgs published an independent review in 2003 on the role and effectiveness of non-executive directors, referencing the FSA’s findings concerning the directors of SPLITs. Higgs reiterated the increased importance of an enhanced board, particularly in areas of audit, remuneration and nomination.
Today, the SPLIT sector is in much better shape since the new rules were applied, and the regulatory changes made in the wake of the crisis mean we are seeing a more enhanced governance framework put in place. Maybe if hedge funds were required to demonstrate similar principles to that of a SPLIT board, we would expect the situation in the Weavering case unlikely to have occurred at all.
Essentially, one would expect investors to take a keen interest in the diversity of hedge funds’ non-executive directors; therefore, it is surprising that the investors of Weavering did not question the fund’s board. The case has raised pertinent questions about the directorship of investment funds and above all, reinforces the importance of sound investors’ due diligence. But what will be interesting is observing how the industry will respond in the coming months to prevent such a situation occurring again.
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60 seconds with... Kenneth Turchin
CAN YOU DESCRIBE YOUR CURRENT ROLE?
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.
IF YOU WERE DOWN TO YOUR LAST £1,000, HOW WOULD YOU INVEST IT?
I would buy THREE shares in Apple and hope for a repeat 383% return in the next five years.
WHAT WOULD YOU DO IF YOU WERE IN PRESIDENT OBAMA’S SHOES?
That’s one pair of size 12 shoes I do not want to be in!
WHO WOULD PLAY YOU IF THEY MADE A MOVIE ABOUT YOUR FIRM?
Kevin Bacon. He is a versatile actor and the centre of the entertainment universe. I am in sales. Everyone in the industry would be linked to me in six steps or less. My client list would be ridiculous.
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