A.R.C. Directors Ltd is a single service provider. Its only service is providing corporate and independent directorships to offshore companies, predominantly (though not exclusively) hedge funds. Alan Tooker, Managing Director of the firm shares the role, responsibilities and key skills needed for an independent director to suceed.
- Why should a hedge fund have an independent director? And what value do they bring?
A fund vehicle is a limited company, and directors have a legal responsibility to exercise duties of loyalty (usually called fiduciary duties) as well as duties of skill and care. If a director is not independent, there is a danger that his duties to the company may conflict with his duties to others, and that the investors in the fund may suffer as a result.
Independent directors can add value in their ability to review the operations of the fund. Questions they should be asking themselves include:
- Is the fund getting value for money from service providers such as the administrators?
- Is the trading advisor sticking to the mandate laid out in the offering documents, and if not what should be done?
- What responsibilities do they carry out?
The board of directors is normally responsible for the central management and control of the fund. This is not the day-to-day running of the fund, but the strategic decision-making process (such as a review of the investment policies and strategies of the fund). Also, the board's role includes reviewing investment performance, monitoring the NAV calculation, monitoring marketing and investor relations and provision of information to shareholders.
Directors can also spend a lot of time reviewing and signing off on documentation, resolutions, etc that form part and parcel of the running of a complex business activity involving many different counterparties.
- How do they differ from other directors on the board of a hedge fund?
Legally, all directors owe the same two duties of loyalty, and skill and care; to that extent independent directors are indistinguishable from the other directors on the board. However, because of their independence, such directors do not have the conflicts of interest that other directors may have, and so may find it easier to remain neutral when reviewing investment performance, effectiveness of the administrator, etc.
- What are the key differences between onshore and offshore funds from a governance perspective?
The meaning of "governance" is hard to define. But if we look at it in the context of corporate governance, and then take that to mean the ways in which rights and responsibilities are shared between the various corporate participants, especially the management and the shareholders, then there should be no key differences. The recent and well-publicised cases of manager fraud in North America have a common theme. There has been little in the way of corporate governance, and there has been little or no independent oversight of the management of the fund in all areas, including those of administration, NAV calculation, audit and the board of directors. In an ideal world, the corporate governance of all hedge funds, whether onshore or offshore, would be strong and effective, as it already is for most funds.
- What skill sets are essentials for an independent director?
One way of answering this question is to consider CIMA's guidelines on fitness and propriety (CIMA is the Cayman Islands Monetary Authority, the body that has regulatory oversight of the Cayman Islands' hedge fund industry). When assessing a candidate's fitness to stand as a director, the Authority considers the candidate's competence and capability. It looks at whether the person has the technical knowledge and ability, and considers the person's professional qualifications and membership of professional institutions. The Authority also considers whether, from experience gained via employment and positions held, the person is able to carry out his responsibilities as director.
In practical terms, the people suitable for the positions of independent directors are likely to have the following attributes:
- strong, relevant industry experience gained over an extended period;
- an eye for detail;
- a commercial perspective;
- the willingness and discipline to respond quickly and effectively to requests for reviewing and signing off on documentation; and
- the maturity and ability required to work closely with hedge fund managers.
- What are the most significant trends in rules and regulations?
Regulators in both Europe and America are taking a much closer look at hedge funds and hedge fund managers.
In America, the impetus for increased regulatory oversight has come partly from well-publicised frauds committed by a tiny minority of fund managers. Generally, most hedge fund managers in the US have been unregulated up to this point, and, in the case of the frauds committed, the hedge funds have suffered from a lack of corporate governance. It is important to note that the overwhelming majority of American hedge fund managers act with honesty and integrity, and investors have benefited hugely from their success over the years. Notwithstanding this, most internal US managers (and many external managers who have US investors) are required to be registered with the SEC by February 2006. Two unfortunate side effects of increased regulation may be to squeeze out innovation and the smaller managers. Also, increased costs are an inevitable consequence.
In Europe, where hedge fund managers have been regulated for many years, manager fraud is not an issue. However, regulators are increasingly concerned about the opaque nature of a lot of hedge fund trading activity, and are looking at ways and means of establishing greater transparency. There are also concerns that managers may not be bound by the same codes of conduct as investment banks and others. Any rules which are introduced as a consequence will, as is almost always the case where regulation is concerned, increase compliance costs for the industry and possibly stifle innovation.
- How will these impact the hedge fund industry – both hedge funds themselves and investors?
The impact on hedge funds themselves has already been noted above.
The impact on investors is likely to be reduced choice for the following reasons:
- Smaller managers in the US and Europe may be squeezed out by the costs and complexity of the imposition of greater regulation.
- Some non-American managers will bar US investors from investing in the hedge funds they manage, because they do not want to go through the rigmarole and expense of registering with the SEC.
- Costs of compliance for some hedge fund strategies may reach a point where the strategies themselves are abandoned or restricted, and innovation is stifled