Scharfman Hedge Fund Governance

Evaluating Oversight, Independence, and Conflicts
1. Auflage 2014
ISBN: 978-0-12-802512-3
Verlag: Elsevier Science & Techn.
Format: EPUB
Kopierschutz: 6 - ePub Watermark

E-Book, Englisch, 384 Seiten

Hedge Fund Governance: Evaluating Oversight, Independence and Conflicts summarizes the fundamental elements of hedge fund governance and principal perspectives on governance arguments. An authoritative reference on governance, it describes the tools needed for developing a flexible, comprehensive hedge fund governance analysis framework. Case studies and interviews with professional fund directors shine a bright light of pragmatism on this framework. The author's global analysis of more than 5,000 hedge fund governance structures enables him to draw realistic conclusions about best practices. He also explores the value consequences of good vs. bad governance, estimating the actual dollar losses that can result from bad governance, as well as the operational and investment performance benefits of certain governance practices. - Presents methods for evaluating qualifications, conflicts of interests, fees, obligations and liabilities of hedge fund Boards of Directors - Explains techniques for developing a hedge fund governance assessment program, including analyzing legal documentation analysis and financial statements for governance related information - Uses case studies and example scenarios in hedge fund governance successes and failures to explore investor governance rights and fund manager responsibilities in onshore and offshore jurisdictions

Jason Scharfman is the Managing Partner of Corgentum Consulting, LLC. He is recognized as one of the leading experts in the field of hedge fund operational due diligence. Before founding Corgentum, he oversaw the operational due diligence function for a $6 billion alternative investment allocation group called Graystone Research at Morgan Stanley. He earned an M.B.A. in finance from Baruch College's Zicklin School of Business and a J.D. from St. John's School of Law. He is admitted to the practice of law in New York and New Jersey. Additionally, he holds the Certified Fraud Examiner (CFE) and Certified in Risk and Information Systems Control (CRISC) credentials.

Autoren/Hrsg.

Scharfman, Jason

Leseproben

Chapter 2

Hedge Fund Board of Directors: A Governance Proxy?

Abstract

This chapter focuses on the hedge fund board of directors with a focus on directors in offshore jurisdictions such as the Cayman Islands. It covers common criticisms of directors as well as arguments in favor of their role. This chapter also addresses common duties and issues relating to hedge fund boards including conflict of interest management, director compensation, the role of associate directors, and the delegation of director duties to other hedge fund service providers.

Keywords

Board of directors

Cayman Islands

conflict of interest

Weavering case

master fund

Chapter Outline Head

 Introduction to the Hedge Fund Board of Directors 33

 Are Vitriolic Director Criticisms Merited? Clarifying a Modest Proposal 35

 A Lack of Uniform Opinion About the Directorship Industry 35

 Institutional Investor Directorship Industry Objections 36

 Wholesale Director Dismissal—Throwing the Baby Out With the Bathwater? 37

 Understanding Hedge Fund Board Structures 39

 Offshore Versus Onshore Hedge Funds 39

 Different Types of Hedge Fund Boards 39

 Clarifying Director Terminology 42

 A Brief History of Hedge Fund Directors 43

 The Forgotten Master Fund Board 44

 Legal Fiction or Effective Board? 44

 Unmasking the Master Board Members 45

 Ignoring the Master Board— Fool’s Paradise or Blissful Ignorance? 46

 Why Investors Should Care About Master Boards 48

 Who are these Board Members? 50

 The Expanding Director Talent Pool—A Blessing and a Curse? 52

 Who Decides Who Gets to be on the Board? 53

 You’re not Who I Hired!—The “Associate Director” Bait and Switch? 54

 Director Compensation— A Double Standard? 56

 What do Directors Actually do? 58

 Director Liability—a few Words about Indemnification 60

 Director Delegation 62

Introduction to the hedge fund board of directors

It’s not an exaggeration to say some people hate hedge fund directors. To provide some perspectives on this matter we will outline some of the common rhetoric raised by critics.

Some people argue that they effectively function as useless rubber stamps. The critics continue that hedge funds could function perfectly fine without them. After all, they claim, it’s not like they perform a crucial function like a prime broker, bank, or auditor. In fact, they claim directors just slow things up at the fund and further complicate the process. Some people think they’re like weeds. Once they get into the fund, they are hard to remove and keep spreading into areas that they are not supposed to get into.

And don’t get them started on the reasons for directors. Some pundits argue the reason for boards of directors at hedge funds is because offshore jurisdictions, or tax havens as they might say need a way to boost the local economy. They base their belief that isn’t the whole concept of directors just an unnecessary effective tax on hedge funds and their investors? They further argue that while directors talk a big game and tell everyone they have true oversight of funds and work on behalf of investors, we all know that in reality all they do is collect fees for little to no work.

Their logic continues that at the end of the day, won’t they always simply side with the hedge fund manager over investors? Hedge funds after all select and hire them, determine their remuneration, and can fire them if they want. Isn’t this whole relationship a little too cozy to not make anyone concerned about conflicts?

Turning to the issue of delegation the critics become even more riled up. Their thinking continues that directors outsource, or to be polite delegate, a lot of their responsibilities to others in a never-ending shell game of passing the buck of liability while still claiming to be accountable enough to do their job. After all, they continue, being a director can’t be that much work, right? If it is, then why can they sit on multiple boards?

The criticisms continue with regards to issues of director capacity. Questions critics raise include what’s the big deal with telling me how many boards they sit on? Are they trying to hide something? Even those who admit how many boards they sit on act like they are doing everyone a favor or making some big revelation. Who cares? They further continue that the numbers are still too high to be meaningful or really make anyone believe that they have the best interest of investors at heart. The critics then focus on the whole issue of directors seeking to reduce their numbers by grouping multiple individual fund boards by relationship, as opposed to providing detail on the actual numbers, just to show they have more capacity. They perhaps rightly raise the question if directors honestly think they are fooling anyone?

Turning to the issue of director qualifications, the critics raise questions as to what even qualifies them to be directors. They continue that many of them are semiretired expat accountants, lawyers, operations people, and the like who have no formal training in some of the key areas they govern. Furthermore, the critics raise the point that many of them have never run a hedge fund, much less invested in one, and therefore raise the question as to what makes them think they are qualified to tell hedge funds what they should and shouldn’t be doing.

Some have argued that these directors are simply a smoke screen and represent a fantastical offshore oasis claiming to promote governance and oversight while instead just going through the motions. Those who are critical of the directorship industry even go so far as to suggest that we should get rid of all directors and let hedge funds and investors work it out themselves and if there is a problem that can’t be worked out, then the courts can handle it. A common question raised by critics in this area is: after all won’t investors and the invisible hand of market dictate what is good governance and what isn’t?

The director criticism continues then to expand beyond this point to focus on offshore regulators. Certain critics raise questions relating to their conflicted interests and argue that they certainly wouldn’t kill the so-called golden goose directorship industry that is the life blood of many of their offshore economies. The critics continue that even if they spotted a problem, the directors themselves wouldn’t dare be critical of the regulators in these offshore jurisdictions and after all, why would they complain for more scrutiny when investors for a long time in many jurisdictions have instead accepted voluntary self-regulation by the directors themselves through industry associations.

Some critics raise points along the lines of, “Really don’t these financial regulators instead provide just enough oversight so nobody complains. And once people do complain they take so long to make any changes that after the consultation period and surveys, they are way behind the curve. They are not as well equipped or resourced to handle real financial problems.”

Furthermore, to support their argument some critics point to allegations of corruption in offshore jurisdictions. For support in this area they look to Alan Stanford’s experience in Antigua and Barbuda and the corruption-related charges brought against the former Premier of the Cayman Islands McKeeva Bush (Britell, 2013a, 2013b). The charges against Mr. Bush, as announced by the Royal Cayman Police Service, included abuse of trust and theft related to the misuse of a government credit card in an American casino.

But maybe its investors who are the biggest joke of them all because they put up with it?

Are vitriolic director criticisms merited? Clarifying a modest proposal

Whether you agree with the criticisms outlined above, it is important to note hedge fund directors come in all shapes and sizes, both good and bad. The role of directors, indeed even their necessity as you may have guessed, is one of the most contentious and hotly debated issues within the world of hedge funds. This is particularly true when you discuss the director’s role in overall hedge fund governance. Indeed, as we outlined in Chapter 1, many in the hedge fund space simply equate the concept of hedge fund governance to the board of directors themselves.

A Lack of Uniform Opinion About the Directorship Industry

Complicating matters further is the fact that there is not necessarily uniformity of opinions about the directorship industry among the different players in the overall hedge fund complex. To clarify here at this point we are talking about criticisms of the directorship industry as a whole. Although the concepts are related, this is not the same as criticizing a particular director or directorship firm. We will address this later issue in more...