A careful assessment of a hedge fund board's role can help ensure alternative fund investors receive governance benefits that justify board expenses, according to a white paper by The Regulatory Fundamentals Group (RFG).

The paper, "The Unasked Question: Fund Directors – Worth It or Not? Why Alternative Funds Are Not Receiving the Value They Should from Their Directors," highlights key questions not being asked about the fund governance process. 

A chief conclusion is that investors and managers who fail to address these issues may not derive sufficient value from their boards.

RFG's paper comes at a time when institutional investors, including pension plans and endowments, are increasing their allocations to alternatives and beginning to scrutinize fund governance more closely.

"Operational risk can sink a fund, but who has responsibility for mitigating operational risk – the manager or the board?" asks Deborah Prutzman, chief executive of RFG. "If this is not clear, investors should justifiably ask, 'Who is steering the ship?'"

Prutzman notes that many jurisdictions, such as the Cayman Islands, consider fund boards to be a "best practice," which may include having a complement of independent directors. 

"Regardless of whether directors are specifically required, investors deserve a clear articulation of what a board is paid to do and how the board intends to achieve its objectives," says Prutzman. "Transparency with respect to fund portfolios is now the norm. Transparency in governance should be equally valued."