The Alignment of Interests Association released a report titled “AOI Hedge Fund Investing Principles” earlier this week. The report in essence outlines a comprehensive “hedge fund code of ethics”, that is, “…a document that outlines suggested best practices in relation to aligning the interests of managers and investors.
At this point, the ideas developed in the AOI report are designed to serve as a basis for continued discussions between investors and hedge fund managers. These principles were came into being though the collaborations of hedge fund investors working with AOI, and represent many of the best ideas exchanged and agreed upon by between participants over the last few years.
AOI Steering Committee helped develop this “hedge fund code of ethics”
The principles in the report were developed though the collective contributions of hedge fund investors worldwide, with guidance and oversight from AOI’s Steering Committee. The Steering Committee includes members from a number of well-known institutions including:
Alfred P. Sloan Foundation
Employees’ Retirement System of Rhode Island
Employees Retirement System of Texas
Fire & Police Pension Association of Colorado
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
University of Toronto Asset Management
Hedge fund code of ethics: Principles for economic and liquidity terms
The AOI report highlights a broad range of principles relating to economic and liquidity terms, including points relating to management fees and expenses, performance fees, manager investment, liquidity, side pockets and preferential terms. Please see the report for further details.
Hedge fund code of ethics: Principles for documentation and governance
In terms of documentation, the AOI report highlights that fund documents should reflect the fiduciary nature of the relationship between the manager and investors, and should provide for only a “reasonable level of protection for managers”, and that all fund documents should be “clear and consistent”.
In terms of governance, the AOI report highlights that governance rules should be “clear and consistent”, with clear policies regarding standards of care, fiduciary duties and fiduciary duty waivers, that the roles, rights, responsibilities and liabilities of the directors, general partners, administrators and managers should be explained clearly, and a fund’s Board of Directors should consist of a majority of independent directors with one board member representing outside investor interests.
Hedge fund code of ethics: Principles for transparency, valuation and disclosures
The AOI report highlights that a high level of portfolio transparency is encouraged so investors can make informed decisions, and moreover, position-level detail should be provided if requested by an investor.
In terms of valuation, the AOI report highlights that managers should have a clearly defined valuation policy, committee and process, which should be disclosed to investors. Any changes in valuation policies should be communicated to investors immediately. The exact valuation responsibilities of the manager, third-party valuation agents, administrator and the BoD or general partner should be spelled out in detail.
The AOI report also provides a comprehensive list of events that should be routinely disclosed to investors.