The Hedge Fund Standards Board, custodians of a set of Standards first drawn up in 2008 between global investors and hedge fund managers to promote best practice, are undergoing their third consultation. And with Dame Amelia Fawcett now at the helm having been appointed Chairman on 1 July 2011, the focus now is very much on taking the Standards globally: their first incarnation were written with an FSA lilt given that the working group contained 14 London-based hedge fund managers.
“I think it’s good manners to make the Standards global,” says Albourne Partners’ Simon Ruddick with a wry grin when speaking to Hedgeweek recently.
Now it seems, the time is right to get fund managers and investors – who after all hunt down global opportunities – in the US and Asia onboard. The third consultation is necessarily being written with more international language. Albourne Partners are one of the HFSB trustees, and Ruddick is quick to point out that in this climate of heavy regulation, the Standards are not attempting to supersede them in any way. For one thing, they don’t have the rule of law behind them.
“I think the Standards have got a real chance of being a positive influence on regulation for two reasons: firstly, they contain technical details and secondly they have good provenance. Regulations are only interesting if they’ve emerged from a meaningful dialogue between investors and funds. They’re somewhat clumsy and can’t respond quickly to changing market conditions: the Standards can.”
Currently, the HFSB have got over 60 hedge fund managers with a combined AUM of USD215billion and nearly 50 international investors signed up, mostly from the UK and continental Europe, although Ruddick confirms that interest in Asia is growing: “We’ve got the likes of Future Fund from Australia and GIC from Singapore on the board of trustees.”
Quite how quickly US managers decide to sign up to the Standards is too early to call at this stage. Referring back to the connection between the Standards and regulation, Ruddick points out that there’s a question mark over whether the US has the resources to enforce various bits of regulation, meaning they could move toward a self-regulatory environment. “They’re not set up to do oversight and enforcement on the scale that direct hands-on regulation would involve. If they go down the self-regulation path they might look to the HFSB as a template,” says Ruddick.
Although US investors are likely to show support and sign up to the Investor Chapter as the HFSB goes ‘global’ under Dame Fawcett’s stewardship, Ruddick explains that it’ll be quicker getting Asian fund managers signed up than US managers because the States is the “world’s most litigious society”.
“One of the reasons the Standards are effective is they don’t have any enforcement mechanism. In-house lawyers to US funds will say ‘You shouldn’t make this declaration lightly because investors will latch onto the fact you’ve signed up to the Standards. If you don’t stick to them you’re going to increase your litigation risk’. Signing up to something that’s not mandatory is not a very American activity,” says Ruddick.
As more US investors sign up though, pressure will surely build on managers stateside to get onboard. The Standards are not just some whimsical set of recommendations, they’ve been forged from earnest dialogue between funds and investors and as such have an important role to play moving forward, particularly in the consultation phases of regulation like AIFMD and the US Form PF. “In the AIFMFD some of the more sensible non-contentious parts were actually cut and pasted from the Standards,” adds Ruddick.
At their best, says Ruddick, the Standards are about creating win-win situations for both funds and investors and uses the recently developed Open Protocol to illustrate his point. “Getting standardised risk management information means there’s more investors can do with it. For hedge fund managers, they get bombarded with requests for risk in different forms, and whilst the Open Protocol won’t make them disappear overnight, if it slowly starts to reduce the myriad ways managers get asked the question then they’ll be that much more efficient. It’s an absolute win-win.”
Open Protocol is a perfect example of the HFSB being supportive of something that’s arisen out of a working group involving investors and fund managers, prime brokers and administrators says Ruddick.
Any instance where the needs and interests of investors and managers are aligned to achieve a common goal, in a straightforward fashion, should be commended. The Standards, as they become more globally accepted, have the potential to bring positive change and a greater sense of unity within the investment community: something most will no doubt welcome as the black clouds of regulation gather on the horizon.
