Originally appeared in MiFID Monitor
Areas such as valuations, disclosure, risk management, business operations, compliance and conflicts of interest are highlighted as critical areas for the adoption of best practices, according to the two private sector committees tasked with establishing best practices for the fund management industry. The committees, which were established in September 2007 by the President’s Working Group on Financial Markets (PWG), have released the finalised sets of best practices for the industry with a view to increasing transparency and accountability in the current financial climate.
The PWG selected the chairmen to lead two private sector committees, the Asset Managers’ Committee and Investors’ Committee, to develop the best practices last year. The Asset Managers’ Committee includes representatives from a diverse group of hedge fund managers. The Investors’ Committee includes representatives from labour organisations, endowments, foundations, corporate and public pension funds, investment consultants and non-US investors.
The draft versions of the best practices were released in April last year and, following the incorporation of feedback from the industry during the consultation period, have now been finalised and published. The finalised version is available to view on the committees’ website and it calls on industry participants to adopt best practices across all aspects of their business.
Eric Mindich, CEO of Eton Park Capital Management, who chairs the Asset Managers’ Committee, explains: “Given all of the events of recent months, it is more important than ever for the hedge fund industry to stand behind a set of far reaching best practices that will promote investor protection and reduce systemic risk.”
Gary Bruebaker, chief investment officer of the Washington State Investment Board, hopes they will provide an important tool to those who are doing the diligence necessary to assess and monitor investments in hedge funds.
The best practices for investors include a fiduciary’s guide, which provides recommendations to individuals charged with evaluating the appropriateness of hedge funds as a component of an investment portfolio. They also include an investor’s guide, which provides recommendations to those charged with executing and administering a hedge fund programme if one is added to the investment portfolio.
The key areas of the report include a call for strong disclosure practices that provide investors with the information they need to determine whether to invest in a fund, to monitor an investment, and to make a decision whether to redeem their investment. With regards to valuation, firms must have: “Robust valuation procedures that call for a segregation of responsibilities, thorough written policies, oversight and other measures for the valuation of assets, including a specific focus on hard-to-value assets,” says the report.
Firms must also adopt comprehensive risk management that emphasises measuring, monitoring and managing risk, including stress testing of portfolios for market and liquidity risk management, the report continues. Moreover, sound and controlled operations and infrastructure must be supported by adequate resources and checks and balances in operations. This is to enable a manager to achieve best industry practice in all of the other areas, the report recommends.
With regards to compliance, conflicts and business practices, firms must adopt specific practices to address conflicts of interest and promote the highest standards of professionalism and a culture of compliance, it continues.
The committees’ work was based on the PWG’s Principles and Guidelines Regarding Private Pools of Capital, issued in February 2007, which sought to enhance investor protections and systemic risk safeguards. The PWG includes the heads of the US Treasury Department, the Federal Reserve Board, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
Visit www.amaicmte.org to see the full list of best practices.