Managers’ views on voluntary hedge fund standards: an about-face?

Hedge Fund Regulation 23 Nov 2008

To help combat public pressure on the hedge fund industry, self-regulation has been pushed to the top of the industry’s agenda over the past year.  Earlier this year, the UK’s Hedge Fund Working Group, a group of over a dozen UK-based mega-funds, published a set of voluntary guidelines governing such things as risk management and fund governance.

Soon after the release of these self-regulatory guidelines, accountancy KPMG surveyed institutional investors to see if they thought hedge funds would actually sign-up.  Nearly 90% of investors thought hedge funds should sign-on to the guidelines.  Yet only 40% felt that “the majority” of hedge funds would actually do so.

As you can see from this chart in the KPMG report, almost half were “not sure” if hedge funds would sign-on at all.  This, even though two-thirds of investors said they would “favour a manager who has signed up” (for pension funds in particular, the proportion was over three-quarters).

Then in late May and early June, Ernst & Young posed a similar question to hedge fund managers themselves.  Only about half of European managers said it was “certain” that they would sign-on the guidelines.  The rest said it was “uncertain” or “unlikely”.  (US and Asian managers were obviously less concerned with these UK-originated guidelines.)

So there seemed to be a lot of goodwill toward the voluntary guidelines coming into this fall.

But a recent survey of over 100 UK-based hedge funds found that very few managers actually planned to sign-up for voluntary standards after all.  The results of the poll by professional services firm Kinetic Partners were released last week and the numbers were surprising.

According the survey only 10% of hedge funds actually planned to sign-up for the standards and only 5% had actually signed-up.  Worse yet for advocates of the standards, one-fifth said they would “definitely not comply“.  Two-thirds remained on the fence.

What’s up with the apparent about face by the managers?  It seems to be motivated by a lack of demand from the investment community.  Despite having told KPMG in January that they would favor managers who signed-on to the guidelines, few seem to be following through with that agenda right now.   Managers pooled by Kinetic reported absolutely no client requests for them to act.  Nada.

But all may not be lost.  Kinetic found that 60% of managers still “agreed” or “strongly agreed” with the idea of self-regulatory standards.  In fact, Kinetic reports that that same proportion actually felt the standards would be “good for the industry“.

The problem seems to be that managers are having trouble investing in the requisite business processes (compliance, risk management etc.) without a hard financial case.  “The client is always right” as they say.  So if the client isn’t bugging them about the standards, then why should the managers be proactive?

The apparent change may result from the distraction posed by recent market calamities.  Or alternatively, the Kinetic poll may have simply missed the funds with the institutional clientele (i.e. the clientele that told KPMG they would “favour” funds that had signed on to the standards.

But whatever the reason, self-regulations seem to face an uphill battle unless investors follow-though with their promises.  One way to help them do that might lie in a new network of like-minded institutional investors called the “Global Association of Alternative Investors” (GAAI).  One of the organization’s stated goals is “…to generate momentum from a plan sponsor perspective to increase market efficiency in the business model of alternative managers.”

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