Hedgeweek exclusive: Hedge fund Standards not a substitute for investor due diligence, says Fauchier Partners’ Chris Fawcett
Christopher Fawcett (pictured) is a senior partner at London-based Fauchier Partners, a fund of hedge funds manager with approximately USD8.1billion in AUM. As one of the trustees of the Hedge Fund Standards Board, he’s keen to point out that the Standards are not an attempt to replace regulation in any way.
“Regulation really should only be about regulating the markets more than applying different types of regulation to different market participants. The Standards are something that investors are looking at, they want to see how the money they entrust to hedge fund managers is being managed. The Standards may be complementary to regulations but they’re not an attempt to substitute them,” Fawcett tells Hedgeweek.
As AIMA’s appointee to the HFSB, Fawcett has been involved in drafting and developing the Standards from the early days of their creation. As their appeal begins to broaden to a wider market, with a good number of the world’s largest hedge funds already signed up (currently 60) or thinking of doing so, Fawcett believes the Standards are helping to create an element of homogeneity.
“Not in terms of how hedge funds manage their money but run their businesses. I think it’ll make them more understandable. People will see them more as part of the mainstream asset management business,” opines Fawcett.
It’s perhaps slightly paradoxical that we’re only now talking about the Standards going global, given the nature of hedge funds. From day one, the industry has been global, investing in all manner of markets and attracting investors from all corners of the earth. “Signing managers up to the Standards globally makes sense from that perspective,” adds Fawcett.
He confirms that there’s “certainly growing interest” in non-European managers becoming signatories. No doubt some of this interest is a result of prompting from investors. Managers realise that by signing up to the Standards they’ll likely become more attractive to their investor base in Fawcett’s view. It’s something that investors will find reassuring.
The Standards, in principal, are a way of engendering best practice within the hedge fund community. Various cases of malpractice have been well documented in recent times, most notably Galleon Group’s Raj Rajaratnam being found guilty of insider trading. They are, then, a way of setting the moral compass. Going back to regulation, Fawcett points out that different banks appear to be marking Greek debt at different levels: in the most highly regulated industry, you’ve still got a situation where banks are being allowed to price their own assets.
That’s now practically unheard of in the hedge fund firmament. Investors simply won’t allow it. Independent asset pricing is very much de rigueur. “It wouldn’t be acceptable if a number of different hedge funds held Greek debt marked at different prices. Sometimes regulation applies different criteria to asset management and banks’ own balance sheets,” says Fawcett, and that’s where regulation and Standards diverge.
Another incentive for taking the Standards globally is the fact that hedge funds’ investor base has become much more institutional in recent years. A large pension fund investing in hedge funds across the US, Europe and Asia would naturally welcome managers signing up. Whilst Fawcett admits that getting more international fund managers adopting the Standards “is a natural evolution” he tempers this by saying: “In Asia I’d expect the speed and number of sign-ups to be greater, proportionately, than the US.”
“A small regional US hedge fund using local investors might not see the need. But from a cynically commercial perspective, signing up to the Standards will increase a hedge fund’s chances of raising assets.”
Fawcett makes an important point by stressing that the Standards are not a substitute for investors carrying out due diligence and monitoring their investment. “However, they do offer a strong indication of how a manager views and runs his business.”