The majority of hedge fund investors and operational due diligence analysts (73 per cent) feel directors do not serve a useful function, according to a survey by Corgentum Consulting.
An even a larger percentage (76 per cent) feel that directors do not provide true independent oversight of funds.
"Offshore jurisdictions and fund directors have an ongoing public relations problem when it comes to investors. Competent fund directors can actually add value to the overall governance of a hedge fund. Many investors simply view these directors as an extension of the fund itself. Compounding the problems 62 per cent of the group surveyed felt directors didn't have much credibility with fund managers," says Jason Scharfman, managing partner of Corgentum Consulting.
Only 39 per cent of respondents indicated that they conduct interviews with fund directors as part of their due diligence process. Furthermore, a much smaller segment (18 per cent) performs background investigation on these directors.
"Many investors are either not researching or under researching hedge fund directors during the due diligence process. This represents a significant missed opportunity to increase their understanding of the governance mechanisms in place at funds. Through operational due diligence, investors and ODD analysts can separate the better directors from the pack," Scharfman adds.
Investors and ODD professionals continue to disagree over how many directorships are appropriate. Approximately 31 per cent thought that the number of fund directorship positions should ideally be capped at 15 directorships, while a smaller percentage (24 per cent) thought the number of directorships should be capped at nine. This challenges previous industry survey data that had shown a higher investor tolerance for more board positions. It also contradicts the reality that many investors accept, where many directors sit on different boards well in excess of these caps.
Sixty three per cent of respondents stated that the most important function of a director was to serve as an investor watchdog. This is at odds with the realities of hedge fund investing where directors have virtually no ongoing interaction directly with fund investors.
Seventy one per cent of investors and ODD analysts felt that directors should be held personally liable if a fund fails for operational reasons. These findings build upon court decisions such as the Weavering case.
