Hedge fund standards drive investment

Date: Tuesday, April 15, 2008
Author: Adrie van der Luijt, dofonline.co.uk

 A KPMG survey has found investors strongly in favour of proposed industry standards.

When making investment allocations, eight out of ten pension funds said they would favour a hedge fund manager who had complied with the Hedge Fund best practice standards.

This is one of the findings of a KPMG survey into investor perspectives of the standards recently outlined by the hedge fund working group (HFWG).

In addition, of the pension funds KPMG surveyed, more than half will require hedge fund managers to comply with the standards within three years.

In 2007, 14 of the UK’s largest hedge fund managers formed the Hedge Fund Working Group (HFWG) with the aim of establishing a benchmark of best practice in the industry and to promote self regulation.

In January 2008, following an extensive consultation process, the HFWG published a report outlining 28 principles for best practice, which cover five key areas – disclosure, risk management, valuation, shareholder conduct and fund governance.

In addition, the hedge funds standards board was established to act as custodian of the standards. The 14 original signatories have committed to ‘comply or explain’ by 31 December 2008.

The final HFWG report, with consultation documents and more information about the Standards and how to sign up, can be found on the HFSB’s website, at the link below.

Tom Brown, European head of KPMG’s Investment Management & Funds Practice, said that the results provided a compelling case for managers to sign up to the standards, particularly if they were expecting to attract institutional money.

“Markets may go up or down, but pressure on managers for increased investor assurance and transparency will only go up,” he added.

For this survey, KPMG commissioned an independent research firm to interview pension funds, fund of hedge funds and investment consultants, with total assets under management of approximately $400 billion.

The survey was conducted over a 10-day period in March 2008.

It found that pension funds are expected to double their asset allocations to hedge funds from an average of 4 per cent to an average of 8 per cent within three years.

More than 50 per cent of investors feel self-certification is appropriate for the standards, but will continue to seek third-party, independent validation for greater assurance.

Valuation, followed by risk management and then disclosure, was cited by survey respondents as the most important issue being addressed by the standards.

Nine out of ten investors categorised asset valuation as “very important”, yielding the highest response rate in the survey.

The survey shows that the standards are not seen by investors as a panacea for their concerns around assurance.

Other standards, including the Alternative Investment Management Association (AIMA)’s sound practices guide and the Global Investment Performance Standards were also cited as ‘very important’ or ‘quite important’.

This suggests that the hedge fund standards will be one of several expected by investors as the industry matures and institutionalises.

Giles Drury, senior manager with KPMG’s alternative investment group, explained that the hedge fund industry is at a turning point.

“Managers can voluntarily choose to adopt the best practice standards proposed by the Hedge Fund Working Group and continue to attract significant capital inflows from institutions, or ignore the recommendations and face the very real threat of more stringent regulation being imposed upon them,” Drury concluded.