Managed Funds Association’s Sound Practices for Hedge Fund Managers  2009 Edition
Sound Practices History <ul><li>First published in 2000 </li></ul><ul><li>Four revisions: 2003, 2005, 2007 and 2009 </li><...
Global Context <ul><li>As G-20 gathers, MFA is taking steps to restore  investor confidence </li></ul><ul><li>G-30 Report ...
Part of MFA’s Global Efforts <ul><li>MFA works with IOSCO to develop global standards for portfolio valuation principles <...
Objectives of  Sound Practices <ul><li>Strengthen business practices of hedge fund industry through a strong framework of ...
Due Diligence Questionnaire <ul><li>Industry commitment to investor protection </li></ul><ul><li>Encourages best practices...
What’s New in 2009 Edition? <ul><li>Represents major overhaul </li></ul><ul><li>Incorporates PWG Asset Managers’ Committee...
Seven Major Sections <ul><li>Disclosure and Investor Protection </li></ul><ul><li>2) Valuation </li></ul><ul><li>3) Risk M...
Disclosure & Investor Protection <ul><li>Disclosure framework:  </li></ul><ul><ul><li>PPM, audited financials, performance...
Valuation <ul><li>Valuation framework </li></ul><ul><li>Valuation governance </li></ul><ul><li>Implementation of valuation...
Risk Management <ul><li>Risk is inherent and essential to returns </li></ul><ul><li>Goal of risk management is not to elim...
Trading and Business Operations <ul><li>Develop integrated framework to manage trading and operations </li></ul><ul><li>Co...
Compliance, Conflicts, Business Practices <ul><li>Establish culture of compliance </li></ul><ul><li>Adopt written Code of ...
Anti-Money Laundering <ul><li>MFA’s pioneering AML Guidance first published in March 2002, following enactment of PATRIOT ...
Business Continuity/Disaster Recovery <ul><li>Establish plan objectives to provide for continuation of essential operation...
Managed Funds Association’s Sound Practices for Hedge Fund Managers  2009 Edition
www.managedfunds.org
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MFA's Sound Practices For Hedge Fund Managers 2007

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MFA's Sound Practices For Hedge Fund Managers 2007

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