Interview
with Alan Tooker, Managing Director of A.R.C.
Directors Ltd
Eurekahedge
December 2005
A.R.C. is a single service provider. Its
only service is providing corporate and
independent directorships to offshore companies,
predominantly (though not exclusively) hedge
funds.
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?
The directors' ability to add value depends
on both their skills and experience, and
the time they have available to review
the operations of the fund.
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.
This is likely to include those with direct
hedge fund experience such as investment
managers, financial officers, operating
officers and compliance officers, and
those with industry "service provider"
experience such as lawyers, accountants
and fund administrators.
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
In addition, increased cost of compliance
may put upward pressure on manager fees,
so increasing the costs to investors of
investing in hedge funds.
