Higher hedge fund standards called for by sovereign wealth funds

Better governance standards across the alternative investment industry could be drawing much closer following the signing of an agreement between The International Forum of Sovereign Wealth Funds (IFSWF) and the Hedge Fund Standards Board (HFSB).

The Hedge Fund Standards Board – an organisation that works with more than 100 major hedge fund managers that manage over $800 billion in assets – recently signed the Mutual Observer relationship with the IFSWF, which is a worldwide network of sovereign wealth funds.

The new agreement aims to stamp out problems that arise in the hedge fund sector, many of which have proved to be among the top concerns mentioned by institutional investors. The primary concerns included an ongoing lack of transparency related to funds’ liquidity terms when the market conditions are turbulent.

A number of large investors, such as sovereign-wealth funds, were extremely unhappy and concerned during the global credit crunch when hedge funds put in place hurdles to prevent investors from removing their money.

The head of sovereigns for Europe, the Middle East, and Africa at US fund manager Invesco Asset Management, Alex Millar, told the Financial Times: "Some hedge fund investments turned out to be less liquid than expected. There was a discrepancy between the risks taken and the risks that were anticipated.”

Other concerns mentioned by institutional investors included the low performance of many hedge funds since the financial crisis eased and the high fees that many of them charge.

The new agreement between the IFSWF and the Hedge Fund Standards Board looks set to boost the relationship between the two, giving each more ability to voice concerns and work out solutions to benefit both sides.

As one US investment bank's head of sovereign funds told the newspaper: "Structuring long-term mandates in exchange for fee discounts and agreeing on the appropriate performance targets and incentives between hedge fund managers and long-term asset owners is challenging,” he said.

However, the chief executive of the New Zealand Superfund and chairman of the IFSWF, Adrian Orr, said that the agreement could help to iron out issues such as these, saying: "This relationship will assist in ensuring that sovereign wealth funds have a voice in the hedge fund standard-setting process. We are delighted to form a closer relationship with the HFSB to share knowledge and experience with the objective to raise Standards in the financial industry."

The new agreement will allow the HFSB to offer advice and useful data to the sovereign wealth fund sector on issues pertaining to the hedge fund industry. It will also enable both organisations to take part in the other;s events as well as co-hosting dialogues that will help to allow for the mutual sharing of ideas ranging from governance and transparency to financial stability.

Meanwhile, Dame Amelia Fawcett, chairman of the HFSB, added: “The interests of the HFSB and IFSWF are very much aligned, particularly in the areas of transparency, good governance, and financial stability.

"The HFSB relies on hedge fund managers and investors to work together to set industry standards, and we welcome closer dialogue with sovereign wealth funds, which are a significant and influential hedge fund investor group.”

The 31 member states of the IFSWF have around $5.5 trillion under their control, which accounts for 80 per cent of global assets managed by sovereign funds around the world. Both this organisation and the HFSB are closely linked with both official stakeholders and regulatory bodies across the globe. Indeed, the HFSB was given affiliate membership in the International Organization of Securities Commissions (IOSCO) in 2014, while the IFSWF was first created under the International Monetary Fund (IMF) in 2009.

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