2. Basis of Survey
• When: Spring /Summer 2011
• Who: Carne Group approached the top 100 allocators globally with
respondents including Aberdeen, Amundi, AXA Fund of Hedge
Funds, Barclays Wealth, CalPERS, FQS Capital, Gottex, Hermes BPK,
IAM, JPMorgan, Liongate, Mercer, Mesirow, Olympia, Permal,
Pictet, Skandia, UBP and USS.
• How Much: Allocators accounting for over $600 billion in AUM, approximately
30% of all hedge fund allocations, are represented in this survey.
3. Analysis of Participants
The Participant Allocators were analysed by both primary activity in the hedge fund industry
and total AUM to give a profile of the respondents
4. Importance of Corporate
Governance Standards
How important is Corporate
Governance?
Participants were asked how
important corporate governance in
hedge funds was to them.
The answer was overwhelmingly that
allocators considered Corporate
Governance to be of extreme
importance with 83% giving this
answer.
5. Affecting the Investment
Decision
Have you ever decided NOT to invest
because of concerns over a funds
corporate governance?
Yet again the response was hugely
weighted towards the importance of
governance with some 76% saying
they had refrained from investing at
least once due to corporate
governance concerns.
6. Affecting the Investment
Decision - II
Would you ever decide NOT to invest
because of concerns over a funds
corporate governance?
When further questioned 91% of
allocators taking part in the survey
confirmed that they would choose not
to invest in a fund if there were
corporate governance concerns.
This is a clear indicator of the
importance of corporate governance
not only to allocators but to managers
in fulfilling their capital raising plans.
7. Increasing Relevance
Has Corporate Governance become
more of a focus in the past 3 years?
When asked if Corporate Governance
had become more of an issue since
2008 the response was perhaps
predictably positive in light of the
difficulties and lessons learnt over this
period. Almost 90% of respondents
confirmed that they were more
focused now on governance issues.
8. Rating Corporate
Governance
How do you rate the average standard
of fund corporate governance in the
hedge fund industry?
The responses when allocators are
asked to rate standards of corporate
governance in the industry between
“Excellent” and “Below Desired Levels
and requiring improvement” point
towards a clear desire on the part of
allocators to see the standards raised.
9. Rating Corporate
Governance
Are you happy with overall
governance levels in these domiciles?
63% of hedge fund allocators are
unhappy with levels of fund
governance in the Cayman Islands
which is the least satisfactory
jurisdiction according to our
respondents.
By contrast to the Cayman Islands and,
to a lesser extent, the Channel Islands,
allocators are extremely satisfied with
governance in both Luxembourg and
Ireland, with high approval ratings for
both jurisdictions.
10. Rating Corporate
Governance
Regional break down of satisfaction
levels (rating out of 10):
Allocators were asked to rate their
satisfaction with corporate governance
arrangements by jurisdiction of
investment manager domicile. As you
can see, opposite, the results indicate
that allocators are significantly more
satisfied with the governance
arrangements of funds promoted by
managers domiciled in Europe than
elsewhere which seems consistent
with the previous slide.
11. Areas Requiring
Improvement
Which areas of fund governance
require improvement?
Respondents were provided with a list
of options to select from and the
results, tabulated opposite, reveal that
investors have a number of concerns
not least of which are the number of
appointments held by directors, the
independence of directors and the
extent of their activities.
12. Minimum standards
What aspects of corporate
governance have you had difficulty
obtaining information on?
Allocators were asked in which areas
they had experienced the most
difficulty when seeking governance-
related information from managers
and fund boards.
Allocators want greater transparency
on the part of many fund boards and
are seeking clarity on many of the
issues listed opposite in the normal
course of their Due Diligence Process.
13. Minimum standards
How many directorships should
independent fund directors hold?
Most allocators we spoke to preferred
to focus on manager relationships
rather than the number of boards an
independent director sits on as it is the
key driver of directors’ time.
The majority of allocators – 58% -
would prefer independent directors to
limit themselves to 30 client
relationships maximum.
14. Minimum Standards
Minimum number of board meetings
per annum
Allocators were asked how many
board meetings should be held
annually, not surprisingly there was a
clear preference for quarterly
meetings.
This is indicative of the importance
investors now ascribe to the regular
meeting of the board in fulfilling its
monitoring obligations.
15. Minimum Standards
Minimum number of meetings per
annum held in person
Extending the prior question to
physical, face to face, meetings it
seems investors also place great
importance on these events with
almost 50% wanting 2 meetings in
person per year and a convincing 90%
arguing for the holding of at least one
physical meeting.
16. Minimum Standards
Minimum number of directors on
board:
Allocators were next asked about
there preferences on board
composition, starting with the number
of directors comprising the board.
Over 90% wanted to see at least 3
directors.
17. Minimum Standards
Minimum number of independent
directors on board
Over 90% of participants stated a
preference for at least 2 independent
directors.
18. Minimum Standards
Proportion of independent directors
on fund boards
Confirming our conclusions from the
two previous questions 87% of
allocators favour a majority
independent board.
19. Minimum Standards
Should the chairman of the board be
an independent director?
Continuing the theme of endorsing
independent directors , their
importance and authority in the board
room of hedge funds allocators voted
80/20 in favour of appointing an
independent chairman of the board.
20. Minimum Standards
Should a senior partner of the
investment manager sit on the board?
It was felt that a senior member of the
investment manager was a valuable
member of the hedge fund board by
70% of allocators.
21. Minimum Standards:
What areas should boards consider at
regular board meetings?
Allocators clearly fell that the board
should be reviewing a wide range of
operational areas of risk on a regular
basis with over 65% of allocators
considering that all the listed areas
should be considered.
22. Minimum Standards
Key skills looked for from fund
directors:
Allocators were presented with a list of
skill sets and asked to indicate if they
were desirable in an independent
director. Interestingly Portfolio
Management ranked last with
investors feeling that this can be
offered by investment manager
attendance at board meetings. Legal
skills were most desired although it is
thought this represents a shortage of
this skills et in the current market
place rather than a distinct preference.
23. Minimum Standards
What is the minimum level of fund
industry experience you would expect
from independent directors?
Allocators indicated that they are
looking for mature, experienced
individuals to act as directors with a
preference for the majority of at least
10 years relevant experience.
24. Minimum Standards
Full time vs part time directors:
Allocators demonstrated a clear
preference for Full Time directors with
the requisite experience and time to
devote to the funds they serve. It was
felt that independent directors who
are heavily involved in the industry
and keep abreast of industry
developments have greater value.
25. Minimum Standards
Should a fund have a director resident
in the domicile of the fund for
tax/domicile purposes?
This is an area of more importance to
allocators with UK-based managers in
their portfolios, due to potential UK
tax risks to the funds but nonetheless
63% of allocators would prefer to have
a director resident in the fund’s
jurisdiction of domicile.
26. Transparency and Conflicts
of Interest
Would you consider any of the
following as independent directors if
related to:
Yet again the allocators questioned
showed a strong preference for
independence with over 60%
indicating that they DO NOT consider
directors related to service to be truly
independent.
27. • Independent directors should have no more than 20-30 client
relationships, and definitely no more than 30 to 40;
• Boards should have at least THREE directors and the majority
Summary Findings should be independent;
• Independence is defined as free from conflicts of interest or where
Taking a consensus view of the it is unlikely that material risks could be incurred by that director’s
responses to the survey the following presence. Directors from service providers are not considered to be
independent by a majority of allocators;
become key points when new or
existing managers are considering the • Directors should be experienced and knowledgeable, with a
composition, structure and operation minimum of 10 to 15 years of experience in the funds industry;
of the boards of funds they promote.
Allocators interviewed have • There should be a minimum of THREE full board meetings per
demonstrated a keen interest in this annum and at least one with directors and manager physically
present. All service providers should present reports to the boards;
area and make it clear in their
responses that corporate governance • Board agendas should cover key areas including conflicts, material
is an increasing area of focus that WILL risk areas, audit findings, financial accounts, adequacy of disclosure,
affect the decision to invest. and compliance (including manager compliance);
• Potential conflicts of interest of directors are a key issue for
investors. They would like to see a written potential conflicts
analysis and policy including the relevant interests of directors (e.g.
other directorships) and service providers. The policy should include
the identification and handling of conflicts when they arise;
• Transparency is an issue with nearly all investors interviewed for
this survey.
