Two private-sector committees established by the President’s Working Group on Financial Markets have issued separate but complementary sets of best practice for hedge fund investors and as
Two private-sector committees established by the President’s Working Group on Financial Markets have issued separate but complementary sets of best practice for hedge fund investors and asset managers designed to improve the standards observed by managers as well as better to equip investors and their advisers to assess the suitability of hedge fund investment and to monitor allocations once they have been made.
‘We want the world’s highest investor protection standards, we want to guard against systemic risk, and keep the US [as] the most competitive financial marketplace in the world,’ says Treasury Secretary Henry M. Paulson.
Former Goldman Sachs chief executive Paulson chairs the working group, which also includes the heads of the US Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission.
‘As these committees were formed, their chairmen and the President’s Working Group believed that markets benefit when experienced and respected participants develop best practices and new accountability standards,’ Paulson says. ‘These are important issues, and these recommendations represent tangible steps towards our goals.’
The committees were selected last September from leading asset managers and investors and given the task of developing a set of best practices for their respective groups of stakeholders. Their work was based on the Principles and Guidelines Regarding Private Pools of Capital issued by the PWG in February last year, which sought to enhance investor protection and safeguards against systemic risk.
The Principles and Guidelines Regarding Private Pools of Capital provided a clear but flexible approach to address issues presented by the growth and dynamism of the hedge fund industry, identifying four sets of stakeholders who contribute to hedge fund vigilance: asset managers, creditors, investors and regulators.
The standards drawn up by the asset managers’ committee, chaired by Eric Mindich, chief executive of Eton Park Capital Management, call on hedge funds to adopt comprehensive best practices in all aspects of their business, including the critical areas of disclosure, valuation of assets, risk management, business operations, compliance and conflicts of interest.
The best practices for investors, drawn up by a committee headed by Russell Read, chief investment officer of the California Public Employees’ Retirement System, include a Fiduciary’s Guide that provides recommendations to individuals charged with evaluating the appropriateness of hedge funds as a component of an investment portfolio.
A separate Investor’s Guide provides recommendations to those charged with executing and administering a hedge fund programme once a hedge fund has been added to the investment portfolio.
According to the US Treasury Department, the best practices documents recommend innovative practices that exceed existing industry standards, and the recommendations complement each other by encouraging both sides of the market to hold the other more accountable.
The best practices have been designed to be consistent with the work already done in the UK, led by the Hedge Funds Working Group and the Alternative Investment Management Association, to improve oversight of the sector.
The Investors’ Committee included representatives from labour organisations, endowments, foundations, corporate and public pension funds, investment consultants and non-US investors. The Asset Managers’ Committee includes representatives from a diverse range of hedge fund managers representing various different strategies.
The recommendations will be open for public comment through the committees’ web site for 60 days, after which they will review and if necessary revise the best practices and standards. The committees will continue to meet to discuss raising the standards for industry participants after the best practices are finalised.
