 |
- Leading industry guidance on risk management, compliance and operations processes for hedge funds
|
The Alternative Investment Management Association (AIMA) has published a new “Guide to Sound Practices for European Hedge Fund Managers,” updating its 2002 version. According to AIMA, the 65-page guide is intended to be a “practical business tool” for hedge fund managers and provides a comprehensive list of best practices relevant to all hedge funds.
For quick overview of key compliance and regulatory issues discussed in the new guide see below. To download the full guide, click here: AIMA 2007 Guide to Sound Practices for European Hedge Fund Managers.
Creating and Managing a Hedge Fund Business
- Hedge Funds should consider importance of appropriately qualified individual to deal with operations, risk, finance and compliance issues
- Management should implement a business risk management process to assess all non-investment risks associated with the business. This process should encompass identification or risk, implementation of controls to mitigate risks, design of a monitoring process, reporting on effectiveness of controls, and ensuring significant risks are reported to management as soon as they are detected
- A business can outsource functions, but not its responsibilities. Firms should undertake a robust review of third parties to assure that they are performing outsourced functions in line with service level agreements
- Management should have the appropriate knowledge and skills to monitor financial the financial resources position of the business and complete relevant regulatory financial filings. Hedge fund managers should be capitalised to meeting minimum regulatory capital requirements with some contingency – at least 10 to 20 percent
- Hedge fund managers should ensure that all staff are fully aware of the regulatory environment and the rules applicable to their area of work. A written Compliance Manual should be used.
- Where compliance functions are outsourced, the responsibility remains with the firm
- Hedge fund managers should conduct a formal monitoring of compliance on at least an annual basis
Investment Process and Portfolio Risk Management
- Hedge fund strategy should be clearly documented and disclosed to investors
- Hedge fund manager should routinely re-evalutate and re-assess its risk parameters within terms of hedge fund mandate
- Hedge fund managers should be aware that potential conflicts of interest might exist or develop from many sources, including formal or informal discussions, activities in the market and other business activities
Portfolio Administration and Operational Controls
- Hedge fund managers should provide adequate disclosure of information to investors on a consistent, regulator and timely basis
- Service providers roles’ should be clearly documented and their performance should be periodically reviewed and documented by the Hedge Fund manager on behalf of the directors
Raising Capital and Investor Relations
- Hedge fund mangers must be conscious of the regulatory restrictions that apply to promoting their services and marketing the Hedge Funds whose investments they manage. This includes the regulations of the jurisdictions in which they operated as well as those in which target investors are located and possibly other jurisdictions. Breaches of these regulations can lead to severe consequences including criminal sanctions as well as reputational damage
- A hedge fund manager should ensure that a senior individual is responsible for all its anti-money laundering compliance and that all employees are kept up to date in this area
- Agreeing to special terms with investors (‘Side Letters’) may have significant legal consequences with long-term implications for the hedge fund and hedge fund manager. Hedge fund managers should carefully consider any conflicts of interest they create by agreeing to special terms and any legal and regulatory requirements to disclose the existence and content of special terms. (To read the AIMA’s Industry Guidance Note on Side Letters, published in 2006, click here.)
- Disclosures to investors should be made as soon as in reasonably practicable, bearing in mind the need to protect all investors’ interests and any applicable legal or regulatory constraints