Alert January 29, 2008

Hedge Fund Working Group Issues Best Practice Standards

The Hedge Fund Working Group (the “HFWG”), an organization of mainly London-based hedge fund managers organized in 2007, has issued a final report on best practice standards for hedge funds (the “Standards”).  The report includes the Standards themselves, a summary of feedback received by the HFWG on a consultation paper published in October 2007 and a discussion of how the Standards are intended to be applied.  The Standards are structured based on the principles of good business conduct promulgated by the UK’s Financial Services Authority (the “FSA”), which apply to investment managers subject to FSA regulation; the Standards have not, however, been passed on by FSA. 

The Standards address the following topics: 

  • disclosure to investors and counterparties
    • investment policy and risks
    • fund terms (e.g., fees and expenses, lock-up periods)
    • performance measurement
    • disclosure to lenders/prime brokers/dealers
  • valuation
    • oversight, policies and procedures
    • segregation of valuation functions
    • hard-to-value assets
  • risk management
    • oversight mechanisms
    • portfolio risk
    • liquidity risk
    • market risk
    • counterparty credit risk
    • control processes
    • disclosure
    • operational risk (governance and personnel, trading and execution, fraud and financial crime prevention, disaster recovery, model risk, IT security and legal and regulatory risk)
    • outsourcing risk
  • fund governance
  • shareholder conduct (including activism)
    • prevention of market abuse (e.g., insider trading)
    • proxy voting
    • disclosure of derivative positions
    • borrowing stock to vote

It is envisioned that hedge fund managers will “sign up” to the Standards, and confirm each year that they continue to follow them.  The firms that formed the HFWG are the initial signatories to the Standards.  (Signatories are listed on the HSFB’s website.) 

The Standards will be maintained by the Hedge Fund Standards Board (the “HFSB”).  The members of the HFWG and the chairman of the Alternative Investment Management Association Limited, a London-based trade association for hedge funds, managed futures and managed currency funds, currently serve as the HFSB’s trustees.  The HFSB will review the Standards on a rolling basis and maintain and develop them as industry conditions change.  The HFSB’s mandate includes considering best practice standards expected to be released by the President’s Working Group on Hedge Fund Managers in the first quarter of 2008 and assessing the scope for convergence between the two sets of standards.  The report indicates that the HFWG has shared information and cooperated with the President’s Working Group from the outset.  The HFSB’s website at includes additional information on the organization and its goals as well as materials for hedge fund managers who wish to become signatories to the Standards.