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“It is not reasonable that any director can truly independently understand and monitor the full range of risks and complexities in today’s highly sophisticated hedge fund” |
Hedge fund failures as a result of sub-prime bets or credit crunch-related losses have increased the need for independent directors at hedge funds. “Historically, corporate governance was viewed as inconsequential in the hedge fund industry, but the recent hedge fund failures have demonstrated the enormous value of an effective independent board capable of protecting and maximizing the interests of investors,” says Don Seymour, managing director at DMS Management, a service provider and adviser to hedge funds. Independent directors are responsible for looking out for issues that arise within the fund, and addressing problems such as regulatory investigations. However, it is not that simple to find independent directors. Whether retired individuals or professional firms of several staff, Seymour says the key is to find directors with the ability “to understand and adapt to investor expectations as outlined in the fund documents and not arbitrary policies conceived in the director’s mind. The potential negative effects of style drift of the investment manager are well understood in the industry but this also applies to directors, who can destroy investor value by imposing their will in a manner inconsistent with investor expectations.”
Seymour says that independent director services have moved beyond part-time practice to a full-time boardroom role. Indeed, firms offering new directorship services, such as DMS Management, are becoming increasingly popular. It is important, however, that the directors have skin in the game, say hedge fund industry participants. “It is a role of responsibility and directors need to be on the hook for that responsibility, otherwise there is no incentive to act in a fiduciary manner,” says Gavin Gray, managing director of Phoenix Fund Services, a hedge fund administrator headquartered in Ireland. He questions firms that do not make sure their directors have some degree of liability. The fiduciary role of an independent director is shared with other service providers to the hedge fund and the management itself. “It is not reasonable that any director can truly independently understand and monitor the full range of risks and complexities in today’s highly sophisticated hedge fund. For the fund control structure to work effectively, these services must function interdependently and be delivered by competent professionals under the oversight of their own governing body, independent of the fund,” says Seymour.
Fee inflation likely
Being personally liable for problems that might arise at the fund, directors must be certain that the fund is properly structured and transparent, and is legally compliant. It’s a burden that some independent directors feel requires greater compensation than in the past. Gray agrees and says that there is likely to be pressure on fees as independent directors become more sought after. At the moment the role of independent director can pay as little as $7,500 a year. Seymour agrees that fees are likely to rise, adding that any increased regulatory responsibilities will also add upward pressure.
