One of the main developments in the hedge fund industry over the past 24 months has been the emergence of stakeholder issues and the increased focus on transparency. Investors have gained a much stronger voice and now have significant influence. Managers appreciate, more than ever before, that they need to invest in communication with investors, listen to them and be accountable to them.
Ogier advises numerous hedge funds domiciled in the Cayman Islands and the British Virgin Islands, and we have seen a variety of changes in the way in which funds are now being structured, governed and managed, changes that have been prompted by the economic environment that we face today.
Liquidity issues have in part led to the blending of private equity and hedge structures and concepts, and the blurring of lines between the two in response to investor demand for, among other things, a greater degree of independence. It is now not uncommon for us to talk of hybrid vehicles that straddle the previously distinct disciplines, and the growth in awareness among managers of the importance of investor views is fundamental.
Widespread liquidity issues have also exposed some of the limitations of existing arrangements and, in particular, the way managers have communicated with their investors in the past. In addition to advising on new structures, we have spent a considerable amount of time over the past two years advising managers and funds on how to discuss options with their investor base and how to tailor documentation going forward.
Much of this advice is common sense as opposed to legal analysis, and it has become clear that managers must seek, and take account of, the views of investors rather than presenting them with a fait accompli in certain situations that investors may perceive as having a detrimental impact on them.
For those structuring new funds, the formal communication begins with the offering document. It is essential that elements previously taken as read are clearly defined. Ambiguity born out of over-familiarity with generic fund documentation has led to numerous complexities in the current environment. When structuring the fund and producing the initial documentation, one must now assume that each element will, at some stage, be tested. The hope that it will not may remain, but clarity is all.
Communication is not only important in times of financial crisis. A willingness to maintain an ongoing dialogue is now a prerequisite. The aim must be that, as further issues arise in this crisis, or in any future financial storm, investors feel appraised of the situation, armed with the facts and confident that the manager has their best interests and protection of their assets at heart from the outset.
This is not a particularly innovative approach, simply one that is more open and transparent than perhaps has been the case in the past. Communication with investors is no longer a choice for managers, it is a necessity. It seems obvious to state, but an informed investor is much more likely to stay the course through the down times, and invest further if the opportunity presents itself, than an investor who feels he has been somewhat cast adrift. The need for communication may well prove to be the most valuable lesson learnt from the current financial maelstrom.
Simon Dinning is the managing partner of Ogier’s London office