12/10/2011 Author: Will Wainewright

Gold standards

HFMWeek meets Dame Amelia Fawcett, new chairman of the Hedge Fund Standards Board, to discuss the industry response to regulation, and the task ahead of her in expanding the global reach of the standards

Dame Amelia Fawcett, the newly appointed chairman of the Hedge Fund Standards Board (HFSB), has an impressive pedigree. Over two decades at Morgan Stanley she rose to COO of European operations, and now holds top non-exec positions at State Street Corporation and Guardian Media Group, alongside multiple other directorships. Ennobled in 2010 for services to the finance industry, the HFSB has secured a powerful leader. But realistically, how much time can she devote to her new role?

She is much more than a figurehead, she is keen to stress to HFMWeek in her first in-depth interview since assuming the role in July this year. “I actively engage myself practically every day with investors and managers, and with the regulators. I’ve had 30-35 meetings in the last three weeks and a couple of speeches. It is very hands-on and that’s the way it’s going to be.”

Fawcett admits that, like her predecessor Antonio Borges, despite a distinguished banking career, she has no direct experience of running a hedge fund. “I have always been on the periphery but I have neither run money nor been in a hedge fund. But it is an incredibly attractive industry.” The “challenges faced by the industry” – including issues of regulation and reputation – are cited as reasons for her choosing to jump into its deep-end as chair.

And she certainly has her work cut out to live up to the headline announcement that accompanied her appointment: the HFSB’s intention to export its standards globally. The hitherto Europe-centric organisation, whose 60 hedge fund signatories account for $215bn of industry assets, lacks members in the US and Asia, a situation she is keen to rectify.

A new US and Asian drive will begin in the New Year, once the consultation paper on the current set of standards is published.

The HFSB seems to have good industry backing, but Phill Chapple, director at consultant KB Associates, says it possibly hasn’t done enough to inform the industry of its aims. “But it could,” he adds, “help reverse the growing mismatch between the standards investors look for in due diligence and what managers think they want.”

If its new chairman is anything to go by, the HFSB is bullish about the role its standards can play in helping the industry, particularly in the regulatory process. Some think the organisation has been overtaken by events since its 2007 launch, when it was perceived by some as a stab at self-regulation, a charge which it refutes. However, the Alternative Investment Management Association (Aima) has since led the industry’s response to the AIFM Directive; while both organisations recently issued responses to Esma’s draft Level 2 advice on the Directive, the HFSB’s only runs to only nine pages compared to Aima’s 111-page offering.

But Fawcett is adamant that the HFSB is uniquely perceived by regulators as a consequence of its large and growing hedge fund investor membership. The organisation, she stresses, is not merely “Aima-light.” She says: “With the HFSB, you have a group of funds and investors who decided to come up with a set of standards they thought would be good for the industry and the markets, which can continually be improved. It is a powerful message for the regulators.”

There is a receptiveness among regulators and officials to talk about standards, she adds. “Yes we speak to lots of regulators and government officials, like Aima does. But our investor involvement means we are viewed differently to lobbying organisations.” The HFSB’s investor chapter now has nearly 50 members, including pension and sovereign wealth funds, which certainly lends it clout. It is hard, however, to see how it is not partially a lobbying group. “We are not lobbying, we are just explaining to regulators how we think this market works best,”
says Fawcett.

Engagement on regulation forms the third aspect to her plans for the HFSB during the next year. The first is a new consultation paper, currently in production and expected to be published in January, which will provide revisions to the standards. The second aspect is taking the standards to managers and investors in the US and Asia. “We are really pushing this in the US and I expect we’ll get a lot of traction with investors quite quickly,” she says. “I expect it might take a little longer with managers. But if we haven’t signed up a big number of US managers within 12-18 months I’d be surprised.” She will promote the standards in Asia with a visit next month.

The growth plans do not stop there. The Middle East is cited as a key growth area for the hedge fund industry, alongside other emerging regions. “It would surprise me if we don’t have Latin American signatories, or certainly investors, at some point,” she adds. “We will go wherever there are hedge funds and investors who want to adopt our standards.”

It is on this point – the universality of standards – that some think the HFSB has a problem. How can one set of standards apply to different-size managers in different regions, where different state regulations apply? “If you look at the standards themselves, they address issues, such as valuation and risk management, which are universal concepts,” says Fawcett. “That’s the beauty of standards. You are not putting someone in a box and then constantly having to revisit the detail because it doesn’t work in a certain market.”

 But what about the more common complaint from smaller managers: that the HFSB is a ‘big boys’ club’ with standards too expensive for them to implement? Andrew Kennedy, COO at sub-$100m London hedge fund Sam Capital, told HFMWeek they had considered joining but chose not to. “I asked some investors about whether it would make a difference and they said no, not really.” Cost was also an issue for the fund. Fawcett argues that the cost of implementation relies on the fund’s size, but admits it is an issue to be looked at. “We are constantly trying to make sure that the standards and the process are as open and as inclusive as possible. Better for the industry, period.”

Some suggest the HFSB may be hamstrung in its drive to appoint US managers by their potential reluctance to adopt standards that investors, in a more litigious environment, may be more prone to call them up on. Fawcett replies that the HFSB sets the standards rather than certificates them, and it is up to investors to make their own checks as part of the due diligence process. But if that is the case, why bother with the standards at all? “What I’m hearing from funds is that the HFSB kitemark helps them in terms of their sale to investors. It helps for smaller funds to show they are playing by the same institutional standards as bigger funds.”

The first three months have certainly been a baptism of fire for Fawcett, who has been tasked with exporting the standards as financial markets and the global economy have lurched back into crisis. However, although her in-tray has been full, the tenure so far has been an enjoyable one. “It has been great working with really bright people – investors and managers – who work in an industry which provides a very important service to the financial markets. It is much maligned, particularly on the continent, but it really is the cradle of innovation, if you think about it.”

She is only too aware of the industry’s investment benefits, sitting on the investment committees of two companies with good size investments in diversified hedge funds. “They are a great diversifier of risk, particularly at the moment,” she says.

Her predecessor Antonio Borges stayed in the job for two and a half years before joining the IMF, but Fawcett makes clear that her long-term commitment is absolute. Nor does she envisage any changes to the organisation’s structure, which consists of a tiny London office and relies heavily on its members to spread the word. “We are a very lean operation, we are young, and we like it that way,” she says. “What I have found very impressive about the HFSB is that board members – managers and investors alike – are deeply committed to this process. Members take on the burden, which is important as it means managers have skin in the game and they really care.”

The HFSB clearly has grand ambitions and it will be interesting to see if it can start to make the running on industry issues in the way Aima has post-AIFM. But in Fawcett it has a leader who is impressively qualified for the role and, it would seem, highly motivated by the challenge as the HFSB looks to lay down a global footprint.