Lynn Strongin Dodds looks at how the recent AIMA guidelines are designed to improve governance in the hedge fund industry
Hedge fund governance is not a new topic but it has been elevated to a new status in the wake of the Madoff scandal and stock market crash. Practices have been tightened and transparency improved but market participants believe that the recently published Alternative Investment Management Association (AIMA) guidelines could light the fire under industry laggards.
“Hedge funds are moving in the right direction but it has been slow,” said Julian Mant, principal of operational consultants at Mercer Sentinel. “The industry is like a large cruise liner. It takes time for it to turn around. I think the AIMA guidelines are a good document and will accelerate the trend. I do not think that it says anything strikingly new but codifies what many hedge funds were already and should be doing.”
Keith Guthrie, chief investment officer of Cardano, a risk management and solvency consultancy, added: “There are several practical and common sense suggestions in the AIMA guide that we would expect hedge funds to take on board, especially if they want to attract institutional money. Adopting it takes many questions that investors have off the table and it could serve as a good marketing tool.”
Hedge funds may have clawed their way back from the depths of the financial crisis and are now enjoying a total reversal of fortune but their investor profile has definitely changed. This is reflected in Deutsche Bank’s ninth alternative annual survey, which shows that high net worth individuals are no longer the backbone of the sector due to diminished bank balances and investment returns. Institutional investors are now the main participants with the study showing 80% of sovereign wealth funds increased their allocations last year. Half raised them by $1bn or more, providing a substantial injection into the industry asset coffers.
Overall, investors are expected to plough more than $200trn into hedge funds this year, taking the total assets under management to a record high of $2.2trn. The survey, which canvassed 528 respondents, showed direct investments into hedge funds top the institutional list. Nearly three-quarters said 80 to 90% of their portfolios would be directed to single strategy while 62% expressed no intentions of going into a fund of hedge funds.
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Malcolm Mclean says getting the channels of communication right and engaging more openly is a good starting point