“I don’t think there should be any service provider directors sitting on the board of a fund,” Charlotte Valeur (pictured) tells Hedgeweek. As the founder of Brook Street Partners and the Global Governance Group, Valeur wields considerable influence in terms of promoting better governance and best practices within the investment community. This is further strengthened by the fact that she’s the chairperson of Brevan Howard Credit Catalysts, a listed fund on the LSE that acts as a feeder to the BHCC Master Fund.
With institutional investors accounting for most new capital flowing into hedge funds today, one of their biggest worries is the governance of funds they’re investing in says Valeur. Brook Street Partners counts many top UK and Scandinavian institutionals as clients, to whom it provides an advisory service, matching their investment needs by sourcing appropriate managers. What they’re saying to Valeur is that whilst they want to increase their allocations into alternatives, they don’t always like the wrapper that funds come in.
“They don’t necessarily want to invest in a fund with a director holding hundreds of different directorships. They’re moving towards the bigger established managers who continue to deliver positive returns even when times are hard,” says Valeur.
What Valeur wants to see is greater governance transparency within unlisted funds. She points out that as the chairperson of BHCC she constantly makes herself available to shareholders to discuss issues “because you need to stay close to investors especially when running listed vehicles. I’m not saying you don’t do that with unlisted vehicles but they don’t have issues like discounts to NAV to deal with or listing rules to cohere to. In an ideal world I’d like to see unlisted funds cohering to the same rules as listed funds.”
Too many unlisted funds are populated by directors sitting on too many boards who are unable to give a level of focus and independence that institutional investors feel comfortable with. Valeur wants to take what she’s doing with BHCC and inculcate it in the offshore firmament where she believes directorships are too readily “rubber stamped” by lawyers.
“Personally I’m pushing very hard to get more transparency in the unlisted fund area. I’ve been speaking to the Hedge Fund Standards Board and they’re looking at governance standards. I think lawyers could do more to influence better practice on the directorship issue. We need to move away from rubber stamp standards,” comments Valeur.
A sea change in terms of how the whole industry deals with board composition is needed in Valeur’s opinion because it’s one of the most pressing concerns, at least amongst the investors she deals with. She recalls that one institution recently told her ‘We see the same names all the time, there’s no way they can sit on all these funds and do a good job’. “And they’re absolutely right. I think it has to be a sea change all round.”
The issue surrounding directorships is an important one but there could be cost implications to ensuring a non-executive director has an acceptable number of funds with which he’s working. This could have a pernicious effect on start-up funds in particular.
Valeur herself holds seven directorships, three of which are with listed companies. She believes anyone in a full-time job shouldn’t have more than two directorships. For those who base their profession on it Valeur says: “ A director focused on relatively standard unlisted hedge funds can, I think, manage up to 20 funds. That would take 30 hours a week, on average.”
Although investors worry about board composition, alarm bells should also go off if someone holds too few according to Valeur. “If you only have three directorships you lose independence because you won’t stand up and be difficult for fear of losing it. You should aim to have at least twice the income on directorships relative to your outgoings as a professional NED so that you can comfortably lose half of them.”
Appointing directors already in full-time roles is completely untenable in Valeur’s opinion. “What if a fund has a problem with one of its administrators and one of the directors is employed by them? It’s a total conflict of interest and just doesn’t work.”
Valeur confirms that she has sent out a list of questions for her clients to use when speaking to fund managers to better gauge the level of governance. “If you get a fund where the directors won’t disclose the number of directorships they have, you know there’s a problem,” she says.
Ultimately, money talks. As the industry becomes more institutionalised investors will turn the screw on proper governance with a little help from Valeur and the likes of the HFSB. If they don’t like what they see, they’ll walk away.
