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MFA's Sound Practices For Hedge Fund Managers 2007

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  • 1. Managed Funds Association’s Sound Practices for Hedge Fund Managers 2009 Edition
  • 2. Sound Practices History
    • First published in 2000
    • Four revisions: 2003, 2005, 2007 and 2009
    • New edition incorporates PWG Best Practices Report of Asset Managers’ Committee
    • Heightened standards of excellence to restore investor trust
    • Due diligence questionnaire provides tools for investors
    • Hedge funds have strong role in helping to restore financial stability and economic recovery
  • 3. Global Context
    • As G-20 gathers, MFA is taking steps to restore investor confidence
    • G-30 Report on financial system stability says:
    • “ The process, to be effective, depends on mutual trust. Trust based on confidence in the integrity of institutions and the continuity of markets.”
    • MFA now working on unified best practices for Financial Stability Forum (FSF) due April 30, 2009
  • 4. Part of MFA’s Global Efforts
    • MFA works with IOSCO to develop global standards for portfolio valuation principles
    • MFA works with IOSCO on task forces to prepare for G-20
    • MFA works with European Commission, meets frequently with European Parliament in Brussels
    • MFA has met with G-7 Finance Ministers
  • 5. Objectives of Sound Practices
    • Strengthen business practices of hedge fund industry through a strong framework of internal policies and procedures
    • Encourage individualized assessment and application of recommendations
    • Enhance market discipline in global financial marketplace to prevent systemic risk
  • 6. Due Diligence Questionnaire
    • Industry commitment to investor protection
    • Encourages best practices in communication between funds and investors
    • Provides more detail than offering documents
    • DDQ in 3 main sections:
      • Investment manager overview
      • Overview of activities of investment manager
      • Fund information
    • More qualitative questions than any
    • Seeks details on personnel, service providers, other businesses, conflicts of interest and investor communications
  • 7. What’s New in 2009 Edition?
    • Represents major overhaul
    • Incorporates PWG Asset Managers’ Committee Best Practices
    • Vastly comprehensive guidance on responsibilities to investors, disclosure and investor protection
  • 8. Seven Major Sections
    • Disclosure and Investor Protection
    • 2) Valuation
    • 3) Risk Management
    • 4) Trading and Business Operations
    • 5) Compliance, Conflicts and Business Practices
    • 6) Anti-Money Laundering
    • 7) Business Continuity/Disaster Recovery
  • 9. Disclosure & Investor Protection
    • Disclosure framework:
      • PPM, audited financials, performance, regular communication with investors
    • Material information:
      • Scope of fund’s operations
    • Responsibilities to investors
    • Conflicts of interest
    • Participation of Investors
    • Disclosure to counterparties
  • 10. Valuation
    • Valuation framework
    • Valuation governance
    • Implementation of valuation policies
    • Valuation policies and procedures
      • Adopt and implement written policies
      • Identify responsible person or team
      • Identify pricing sources
      • Adopt accounting standards (eg GAAP, IFRS)
      • Set-up internal documentation
      • Establish policies for valuing hard-to-value assets
      • Include guidelines on side pockets
  • 11. Risk Management
    • Risk is inherent and essential to returns
    • Goal of risk management is not to eliminate risk, but to understand it and manage it prudently
    • Overall approach should include risk profiles for each fund and appointment of Chief Risk Officer
    • Periodic review of risk measurement, monitoring and management procedures
    • Identify categories of risk:
      • Liquidity risk
      • Leverage risk
      • Market risk
      • Counterparty credit risk
      • Operational risk
      • Legal and compliance risk
  • 12. Trading and Business Operations
    • Develop integrated framework to manage trading and operations
    • Conduct due diligence on counterparties
    • Develop cash management and collateral management framework
    • Select and monitor reputable key service providers
    • Develop core infrastructure and operational practices
    • Include practices for OTC derivatives and complex products
    • Develop and monitor systems for core accounting practices
    • Develop and monitor information technology practices
    • Seek best execution in trading activities
  • 13. Compliance, Conflicts, Business Practices
    • Establish culture of compliance
    • Adopt written Code of Ethics
    • Develop written compliance manual
    • Train and educate personnel about compliance
    • Dedicate resources to compliance and appoint Chief Compliance Officer
  • 14. Anti-Money Laundering
    • MFA’s pioneering AML Guidance first published in March 2002, following enactment of PATRIOT Act
    • Although Treasury has not issued rules, hedge funds should adopt and implement AML programs
    • MFA’s AML Guidance update in 2007
    • Guidance now inside Sound Practices (no longer appendix)
  • 15. Business Continuity/Disaster Recovery
    • Establish plan objectives to provide for continuation of essential operations in event of natural disaster, market disruption, terrorist attack, loss of key person or business emergency
      • Detail mission-critical systems
      • Identify personnel to achieve objectives
      • Replicate technology systems
      • Train and test at least annually
      • An oversight person or team should be responsible for regulatory reporting and compliance
      • Create business continuity, contingency and succession plans
    • Plan for crisis management and disaster recovery
    • Understand and use government resources as necessary
  • 16. Managed Funds Association’s Sound Practices for Hedge Fund Managers 2009 Edition
  • 17. www.managedfunds.org