A new set of best practices for the U.S. hedge fund industry has been published by groups representing hedge funds and investors. The two groups - the Asset Managers’ Committee and the Investors’ Committee - were set up by the U.S. President’s Working Group (PWG) on Financial Markets in September last year in response to ongoing concern about the lack of hedge fund regulation. The PWG initiative follows in the footsteps of the U.K. Hedge Fund Working Group, which published its Best Practice Standards in January, and its results aim to be consistent with the U.K. rules.
Announcing the release of the committees’ reports, U.S. Treasury Secretary Hank Paulson said that the United States wanted the 'world’s highest investor protection standards' and 'to keep the United States the most competitive financial marketplace in the world.'
The Asset Managers’ Committee (AMC), composed of ten large U.S. hedge funds, said its report ('Best Practices for the Hedge Fund Industry') had three goals: to call on hedge funds to adopt best practices in all aspects of their business, to recommend “innovative and far-reaching” practices that exceed existing standards, and to increase accountability for hedge fund managers. According to the AMC, the purpose of publishing a separate investors report was to promote accountability and help ensure that best practices would be adopted.
Like the U.K. Hedge Fund Working Group’s standards, the U.S. best practices will be voluntary and aim to encourage compliance with the rules through market competition and investor pressure. Each of the ten funds participating in the committee will implement the rules. Unlike the U.K. rules the U.S. best practices do not propose a “comply or explain” approach to the rules; instead, the report suggests that “the manner in which each manager implements the best practices will by necessity differ in light of each manager’s size, strategies, products and other salient characteristics of the business.”
Key recommendations in the report include:
Disclosure
- Comprehensive investor disclosure based on the public company model including comprehensive summary of performance, qualitative discussion of performance and annual and quarterly reports
- Timely disclosure of material events
- Independently audited, GAAP - compliant financial statements to ensure accurate and verified financial information
Valuation
- Hedge funds to implement new U.S. accounting standards on hard-to-value assets (which require financial institutions to categorise assets in three levels) and then disclose on a quarterly basis the portion of assets and profit (or loss) attributable to each kind of asset
Segregating Duties to Minimize Conflicts of Interest
- Hedge fund managers to establish a Conflicts Committee to review potential conflicts and address them as they arise
- Hedge funds should segregate functions between portfolio managers and non-trading personnel responsible for implementing valuation process
Assessing Counterparty Risk
- Report recommends managers assess creditworthiness of counterparties and understand 'complex legal relationships' they may have with counterparties
The recommendations are open for public comment for 60 days before the final standards are published. To read the Asset Managers’ Committee report, click here: Best Practices for the Hedge Fund Industry. To read the Investors’ Committee report, click here Principles and Best Practices for Hedge Fund Investors.