Progress report
An assessment of hedge fund YTD performance in the face of renewed fears for a potential eurozone crash Read More
09/11/2011
Comment: Dermot Butler
There has been a flood of comment on the obligations and responsibilities of alternative investment and hedge fund directors, since the publication of the now-famous Weavering Judgement by Mr Justice Jones of the Grand Court of Cayman on 26 August. So much so that if a Martian had landed on Earth on 25 August they could be forgiven for assuming that nobody had considered the good governance of hedge funds’ directors before and that this topic had only just been put on the agenda. Indeed, in a good recent article by Julian Korek in an October edition of HFMWeek, Korek seems to support this contention. He states "There is little guidance on directors' duties and it appears that most of the responsibility for establishing good governance falls on fund managers."
Personally, I would suggest that the responsibility for establishing good governance does, in most cases, fall on the board of directors collectively and not on the fund's managers – putting the responsibility on the shoulders of the managers reminds one of the ‘fox in the henhouse’ stories. Of course in the Weavering case this is exactly what happened, with disastrous results, and, although I would not be surprised if similar cases hit the headlines in the future, it must be recognised that most hedge fund managers and directors are honest and responsible and try to serve their funds and investors in those funds to the best of their ability. Nevertheless, I would agree with Korek’s comments about the depth of investors’ due diligence, which was sadly, and expensively, lacking in the Weavering case.
However, placing responsibility for directors’ governance on the collective board of the fund is very similar to the approach that the Central Bank of Ireland, the regulator responsible, appears to be taking with regard to Irish Ucits funds. The Irish regulator is in the latter stages of introducing a new and very comprehensive personal questionnaire which each director of an Irish Ucits fund – and, I presume, any other Irish fund – must complete in order to establish their fitness and probity to serve on the board. But, it seems likely that it will be up to the board to decide whether the sum of the skills, knowledge and experience of the collective board will be sufficient to ensure effective management of the fund.
Korek's claim that there is no, and never has been any, guidance for directors of hedge funds is just plain wrong. I would say that there is ample guidance on directors’ duties and has been for several years. I would draw Korek's attention to the Aima Guide for Alternative Fund Directors, the original edition of which was published in 2005, although it has been updated since then. I have to declare an interest here in that I was one of the co-authors of that guide and Custom House was a co-sponsor – nevertheless I would suggest that that guide, even the original 2005 edition, provides most directors of hedge funds with enough information to help them work out what they should be doing and why, in a manner that would satisfy Mr Justice Jones.
One final comment: many commentators, and indeed regulators, have supported limiting the number of directorships that any one individual may hold to an arbitrary number. Apart from not being entirely logical, this policy could be grossly unfair to many directors. What the Irish regulator has decided is not only that the board itself should police the governance of its directors, but that the board should determine how much time each director needs to adequately carry out their function properly. For many straightforward hedge funds, a director’s time commitment may be between 20 and 30 hours a year, whereas more complex structures and strategies may require substantially more time each year. It is the sum of those time commitments that should determine how many funds an individual may act for, given his time capacity.
Dermot Butler is the chairman of Custom House Group
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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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