UK - The standard of governance within the hedge fund industry is exposing schemes to high risks and needs significant improvements, the £30bn ($49bn) Universities Superannuation Scheme says.
USS absolute return strategies portfolio manager Luke Dixon said governance had become a "make or break" area in the investment decision-making process - and urged scheme investors to offer suggestions for improvement to managers when they believe governance is sub-standard.
He said: "For fund investors, governance is the single most important consideration that can determine an investor's access to their capital. Poor fund governance is a significant risk for investors and one that is borne without any associated reward."
USS co-head of responsible investment Daniel Summerfield agreed - noting the standards of governance needed to be significantly improved.
He said: "The standard of governance within the hedge fund industry needs significant improvements and is currently exposing investors to high risks."
USS said one critical factor, which is often overlooked, is the role, responsibilities and quality of independent directors.
Dixon said the constitutional documents of hedge funds were frequently drafted with a strong bias towards the interests of the investment manager or adviser - and offered few rights or protections to investors.
He said conflicts of interest frequently exist between the hedge fund's board of directors, investment managers and the fund's advisors - leading to decisions being taken in the interests of the hedge fund's investment manager rather than in the interests of the fund and its shareholders as a whole, which is contrary to the fiduciary obligations of the fund's directors
Dixon warned: "This is an issue previously overlooked by many hedge fund investors in their due diligence of potential hedge fund investments however."
He added: "Investors recommend that governance structures and oversight responsibilities should be in place to protect them, and, would want all oversight responsibilities to be undertaken by responsible, knowledgeable and independent fiduciaries."
The comments come in a guide to hedge funds published by the Alternative Investment Management Association today.
The guide was written by experts at some of the world's biggest pension schemes - including the USS's Luke Dixon, Kurt Silberstein from CalPERS and Michelle McGregor Smith from BA Pension Investment Management.
The hedge fund association's guide - A Guide To Institutional Investors' Views And Preferences Regarding Hedge Fund Operational Infrastructures - outlines investor views, expectations and preferences on a variety of operational and organisational issues, which are increasingly the focus of due diligence reviews and discussion among both scheme investors and fund managers.
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