In recent years, institutional investors have taken a more proactive approach to vetting the independent directors of hedge funds, so it is critical that investment managers take the appointment of directors seriously. In this article, we outline some of the key considerations investment managers should discuss when selecting their next hedge fund director, and more specifically what they should consider when appointing an independent director.
Institutional investors attach great importance to governance and spend a significant amount of resources on conducting due diligence investigations into potential hedge fund investments. The broader a director’s experience is across finance, IT and governance, the more likely he or she is to provide sound guidance on issues.
In addition, regulators internationally closely scrutinize the governance of funds and their directors, as well as the management of their assets.
The role of the non-executive director
The role of a non-executive director is to oversee the work of the investment managers to ensure that the fund’s objectives and risk appetite are respected.
Hedge fund managers trade investors’ money within the parameters drawn from the fund’s offering materials. Because of this most investors prefer to see independent non-executive directors on the board of the fund to perform an oversight role over how their assets are managed. This gives the investors the peace of mind that there is a party independent of the investment manager overseeing the operations and that assets are being managed in line with the offering materials.
The non-executive directors can also provide guidance in expected policies and procedures, regulatory compliance, vendor due diligence procedures and a number of other areas depending on their experience. A good board includes a number of independent directors with a mixture of skills that will bring a well rounded approach to the governance of the fund.
Historic studies have found that over 83% of investors prefer a fund’s board to have at least 2 independent directors with further enforced by the Council of Institutional Investors (CII) corporate governance policies recommending at least two thirds of the board should consist of independent directors.
It doesn’t matter what the size or maturity of your organisation is, an experienced independent non-executive director can add value to your board. Whether it be to attract institutional investors or just to add experience and gain from their extensive knowledge of the industry the directors will be able to guide your organisation and ensure it meets its corporate governance requirements.
If you are interested in having one of our experienced directors help your organisation please reach out to us at firstname.lastname@example.org to set up a call.