Basis of Survey• When: Spring /Summer 2011• Who: Carne Group approached the top 100 allocators globally with respondents including Aberdeen, Amundi, AXA Fund of Hedge Funds, Barclays Wealth, CalPERS, FQS Capital, Gottex, Hermes BPK, IAM, JPMorgan, Liongate, Mercer, Mesirow, Olympia, Permal, Pictet, Skandia, UBP and USS.• How Much: Allocators accounting for over $600 billion in AUM, approximately 30% of all hedge fund allocations, are represented in this survey.
Analysis of ParticipantsThe Participant Allocators were analysed by both primary activity in the hedge fund industryand total AUM to give a profile of the respondents
Importance of CorporateGovernance StandardsHow important is CorporateGovernance?Participants were asked howimportant corporate governance inhedge funds was to them.The answer was overwhelmingly thatallocators considered CorporateGovernance to be of extremeimportance with 83% giving thisanswer.
Affecting the InvestmentDecisionHave you ever decided NOT to investbecause of concerns over a fundscorporate governance?Yet again the response was hugelyweighted towards the importance ofgovernance with some 76% sayingthey had refrained from investing atleast once due to corporategovernance concerns.
Affecting the InvestmentDecision - IIWould you ever decide NOT to investbecause of concerns over a fundscorporate governance?When further questioned 91% ofallocators taking part in the surveyconfirmed that they would choose notto invest in a fund if there werecorporate governance concerns.This is a clear indicator of theimportance of corporate governancenot only to allocators but to managersin fulfilling their capital raising plans.
Increasing RelevanceHas Corporate Governance becomemore of a focus in the past 3 years?When asked if Corporate Governancehad become more of an issue since2008 the response was perhapspredictably positive in light of thedifficulties and lessons learnt over thisperiod. Almost 90% of respondentsconfirmed that they were morefocused now on governance issues.
Rating CorporateGovernanceHow do you rate the average standardof fund corporate governance in thehedge fund industry?The responses when allocators areasked to rate standards of corporategovernance in the industry between“Excellent” and “Below Desired Levelsand requiring improvement” pointtowards a clear desire on the part ofallocators to see the standards raised.
Rating CorporateGovernanceAre you happy with overallgovernance levels in these domiciles?63% of hedge fund allocators areunhappy with levels of fundgovernance in the Cayman Islandswhich is the least satisfactoryjurisdiction according to ourrespondents.By contrast to the Cayman Islands and,to a lesser extent, the Channel Islands,allocators are extremely satisfied withgovernance in both Luxembourg andIreland, with high approval ratings forboth jurisdictions.
Rating CorporateGovernanceRegional break down of satisfactionlevels (rating out of 10):Allocators were asked to rate theirsatisfaction with corporate governancearrangements by jurisdiction ofinvestment manager domicile. As youcan see, opposite, the results indicatethat allocators are significantly moresatisfied with the governancearrangements of funds promoted bymanagers domiciled in Europe thanelsewhere which seems consistentwith the previous slide.
Areas RequiringImprovementWhich areas of fund governancerequire improvement?Respondents were provided with a listof options to select from and theresults, tabulated opposite, reveal thatinvestors have a number of concernsnot least of which are the number ofappointments held by directors, theindependence of directors and theextent of their activities.
Minimum standardsWhat aspects of corporategovernance have you had difficultyobtaining information on?Allocators were asked in which areasthey had experienced the mostdifficulty when seeking governance-related information from managersand fund boards.Allocators want greater transparencyon the part of many fund boards andare seeking clarity on many of theissues listed opposite in the normalcourse of their Due Diligence Process.
Minimum standardsHow many directorships shouldindependent fund directors hold?Most allocators we spoke to preferredto focus on manager relationshipsrather than the number of boards anindependent director sits on as it is thekey driver of directors’ time.The majority of allocators – 58% -would prefer independent directors tolimit themselves to 30 clientrelationships maximum.
Minimum StandardsMinimum number of board meetingsper annumAllocators were asked how manyboard meetings should be heldannually, not surprisingly there was aclear preference for quarterlymeetings.This is indicative of the importanceinvestors now ascribe to the regularmeeting of the board in fulfilling itsmonitoring obligations.
Minimum StandardsMinimum number of meetings perannum held in personExtending the prior question tophysical, face to face, meetings itseems investors also place greatimportance on these events withalmost 50% wanting 2 meetings inperson per year and a convincing 90%arguing for the holding of at least onephysical meeting.
Minimum StandardsMinimum number of directors onboard:Allocators were next asked aboutthere preferences on boardcomposition, starting with the numberof directors comprising the board.Over 90% wanted to see at least 3directors.
Minimum StandardsMinimum number of independentdirectors on boardOver 90% of participants stated apreference for at least 2 independentdirectors.
Minimum StandardsProportion of independent directorson fund boardsConfirming our conclusions from thetwo previous questions 87% ofallocators favour a majorityindependent board.
Minimum StandardsShould the chairman of the board bean independent director?Continuing the theme of endorsingindependent directors , theirimportance and authority in the boardroom of hedge funds allocators voted80/20 in favour of appointing anindependent chairman of the board.
Minimum StandardsShould a senior partner of theinvestment manager sit on the board?It was felt that a senior member of theinvestment manager was a valuablemember of the hedge fund board by70% of allocators.
Minimum Standards:What areas should boards consider atregular board meetings?Allocators clearly fell that the boardshould be reviewing a wide range ofoperational areas of risk on a regularbasis with over 65% of allocatorsconsidering that all the listed areasshould be considered.
Minimum StandardsKey skills looked for from funddirectors:Allocators were presented with a list ofskill sets and asked to indicate if theywere desirable in an independentdirector. Interestingly PortfolioManagement ranked last withinvestors feeling that this can beoffered by investment managerattendance at board meetings. Legalskills were most desired although it isthought this represents a shortage ofthis skills et in the current marketplace rather than a distinct preference.
Minimum StandardsWhat is the minimum level of fundindustry experience you would expectfrom independent directors?Allocators indicated that they arelooking for mature, experiencedindividuals to act as directors with apreference for the majority of at least10 years relevant experience.
Minimum StandardsFull time vs part time directors:Allocators demonstrated a clearpreference for Full Time directors withthe requisite experience and time todevote to the funds they serve. It wasfelt that independent directors whoare heavily involved in the industryand keep abreast of industrydevelopments have greater value.
Minimum StandardsShould a fund have a director residentin the domicile of the fund fortax/domicile purposes?This is an area of more importance toallocators with UK-based managers intheir portfolios, due to potential UKtax risks to the funds but nonetheless63% of allocators would prefer to havea director resident in the fund’sjurisdiction of domicile.
Transparency and Conflictsof InterestWould you consider any of thefollowing as independent directors ifrelated to:Yet again the allocators questionedshowed a strong preference forindependence with over 60%indicating that they DO NOT considerdirectors related to service to be trulyindependent.
• Independent directors should have no more than 20-30 client relationships, and definitely no more than 30 to 40; • Boards should have at least THREE directors and the majoritySummary Findings should be independent; • Independence is defined as free from conflicts of interest or whereTaking a consensus view of the it is unlikely that material risks could be incurred by that director’sresponses to the survey the following presence. Directors from service providers are not considered to be independent by a majority of allocators;become key points when new orexisting managers are considering the • Directors should be experienced and knowledgeable, with acomposition, structure and operation minimum of 10 to 15 years of experience in the funds industry;of the boards of funds they promote.Allocators interviewed have • There should be a minimum of THREE full board meetings perdemonstrated a keen interest in this annum and at least one with directors and manager physically present. All service providers should present reports to the boards;area and make it clear in theirresponses that corporate governance • Board agendas should cover key areas including conflicts, materialis an increasing area of focus that WILL risk areas, audit findings, financial accounts, adequacy of disclosure,affect the decision to invest. and compliance (including manager compliance); • Potential conflicts of interest of directors are a key issue for investors. They would like to see a written potential conflicts analysis and policy including the relevant interests of directors (e.g. other directorships) and service providers. The policy should include the identification and handling of conflicts when they arise; • Transparency is an issue with nearly all investors interviewed for this survey.