1. The growing importance of fund governance Simon Osborn, CEO, IFI Global February 2015

2. By Simon Osborn, CEO IFI Global The growing importance of fund governance 2 Introduction Fund governance is probably the last remaining area of the fund industry where standards still vary substantially around the world. Fund governance is taken more seriously by some investors and managers than others. This is another differentiator from the rest of the fund industry. Fund governance standards are likely to converge over the next few years. But progress could be slow.

3. By Simon Osborn, CEO IFI Global The growing importance of fund governance 3 Pre the market crash fund governance was of little interest to most investors and managers: “The role of the fund director in the typical offshore structure is relatively minor. That is not to say that there is not a legally defined job for the fund director to undertake but simply that the law of the offshore jurisdiction recognises that the job is reduced to one of mere supervision.” Tony Travers, Travers Thorp Alberga Background

4. By Simon Osborn, CEO IFI Global The growing importance of fund governance 4 Post the crash governance is being taken more seriously: “Certain well-documented cases from 2008 remain in the collective memory of investors….. We certainly see evidence in our due diligence of many properly functioning boards where there is meaningful and healthy oversight.” David Woodhouse, Permal “We would like directors to challenge managers when there are direct conflicts with shareholders that were not previously disclosed to, and consented to, by shareholders.” Greg Robbins, Mesirow The power that fund boards have (in theory but rarely tested), was often put to use in the fallout from the crash. For the first time, in many cases, investors looked to directors of the problem funds that were invested with for assistance. The Madoff feeder funds & Weavering are the most public examples of what can go wrong when there is not proper board supervision, and weak directors, but there are many others. Background

5. By Simon Osborn, CEO IFI Global The growing importance of fund governance 5 In 2012 The NED conducted a survey with institutional investors on corporate governance of alternative funds. (The survey is being done again in 2015.) The results of this survey showed that there is no settled understanding on the role or purpose of corporate governance in the hedge fund industry. It also demonstrated that there is a wide variety of views from institutional investors on how much they should become involved in the governance process. But the overwhelming majority of investors interviewed said that corporate fund governance issues have become more important to them since the crash. Background

6. By Simon Osborn, CEO IFI Global The growing importance of fund governance 6 Please state in what areas you would most like to see improvements. For example, do you think that improvements could be made in any of the following areas: a) Board composition (including more independence on boards) b) Director qualifications (For example, more directors with portfolio management or risk management experience) c) Director capacity d) Conflicts of interest e) Directors’ duties and responsibilities (For example, directors’ willingness to speak with shareholders, and poll other shareholders when concerns are raised) Conflicts of interest was easily the most commonly stated concern. This was followed by directors’ duties and board composition. These items have been mentioned substantially more than the others. The importance of conflicts of interest

7. By Simon Osborn, CEO IFI Global The growing importance of fund governance 7 If standards of (alternative) fund governance are ever going to improve then the US will have to become more interested - and investors will need to get more involved. There are some hopeful signs: Developments in the US AOI (Alignment of Interests Association) FGA (Fund Governance Association) The future

8. By Simon Osborn, CEO IFI Global The growing importance of fund governance 8 US developments Institutionalisation of the industry is the main driver of change Institutions have replaced HNWIs as the dominant investor segment in the US (as elsewhere) Growing awareness of governance problems at partnership structures “There are problems lurking in the legal documents (of partnership structures) that govern the investment, and ‘lurking’ is the right word because if you are not attuned to these issues, then you likely would not even realise that they are there. They can cost investors many millions of dollars.” Gerald Kerner, Duquesne Capital Management (Stanley Druckenmiller’s lawyer)

9. By Simon Osborn, CEO IFI Global The growing importance of fund governance 9 US developments Growth of offshore funds feeding into US Master Limited Partnerships “This trend only heightens the need for General-Partner governing bodies to introduce some independent oversight to mitigate the risk of corporate governance at feeder level being rendered meaningless by arbitrary action at the master level.” David Woodhouse, Permal Emerging independent governance oversight at least some US partnership structures “While it’s not quite a trend yet, there has clearly been an increase in the establishment of board of director-like committees.” Steven Nadel, Partner, Seward & Kissel

10. By Simon Osborn, CEO IFI Global The growing importance of fund governance 10 AOI The AOI is the first investor organisation to focus on improving fund governance (this is one of its three core principles) The AOI Steering Committee includes members from the following institutions: Alfred P. Sloan Foundation; Employees’ Retirement System of Rhode Island; Employees Retirement System of Texas; Fire & Police Pension Association of Colorado; MetLife; OMERS Capital Markets; San Bernardino County Employees’ Retirement Association; Siemens Financial Services GmbH; South Carolina Retirement Systems' Investment Commission; State Board of Administration of Florida; Teacher Retirement System of Texas; The University of Texas Investment Management Company and the University of Toronto Asset Management.

11. By Simon Osborn, CEO IFI Global The growing importance of fund governance 11 AOI In its section on hedge fund governance the AOI includes the following: A fund’s Board of Directors should consist of a majority of independent directors, each of whom is reasonably qualified with the skills and experience to fulfil the role. At least one board member should primarily represent outside investor interests. The number of boards each fund’s board members sit on should be provided to investors along with any other related information requested by investors. “This a big next step in the industry, because it shows that large institutional investors are now collaborating to come up with what they think are fair hedge fund investment terms.” Steven Nadel, Partner, Seward and Kissel

12. By Simon Osborn, CEO IFI Global The growing importance of fund governance 12 The FGA The FGA is for all industry constituent groups (ie investors, managers, service providers, lawyers, non-executive directors etc). The FGA is a not for profit company that is owned by its members. It is entirely independent. Members are responsible for making the Association’s policies. The establishment of the FGA means that investors and the industry have a body that they can look to for help on governance questions. The FGA will produce its own code of sound practice on fund governance. It is intended that this voluntary code will be adopted as a benchmark and become the industry standard.

13. By Simon Osborn, CEO IFI Global The growing importance of fund governance 13 The FGA In addition, the FGA proposes: 1) To develop a global database of fund directors that investors and managers can depend upon. The goal of the database is to provide the industry with an independent source of information on prospective directors of funds, those that meet the highest standards of competency and integrity. 2) To educate investors and managers on all aspects of fund governance. The FGA will host seminars and circulate papers on fund governance topics in order to explain to investors and managers why they should take governance seriously – and how this Association can help them do this.