The Power 100 Process | Chief Investment Officer

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“In a series of rapid-fire tweets posted earlier this year, Jay-Z held forth on his favorite cereal (Cap’n Crunch) and his greatest strength (‘my genius’). For her part Beyoncé revealed in GQ that, since 2005, she has employed a full-time videographer to document her every waking moment.”

That is not a made-up quote. It is an apparently straight-faced factoid about Shawn (“Jay-Z”) Carter and Beyoncé Knowles, the power-couple topping Vanity Fair’s list of the who’s who in Editor Graydon Carter’s world, “The New Establishment: The Powers That Be.” They are, in essence, the celebrity world’s equivalent to Henrik Gade Jepsen, the man who leads this year’s Power 100 listing of the world’s most influential asset-owner chief investment officers. And, while the rest of the Vanity Fair list has more gravitas—New York City Mayor Michael Bloomberg, publishing titan Rupert Murdoch, and New York Times Editor Jill Abramson all find themselves in a deserved top 10 position—the list prompted a question for me: Is this all absurd?

The answer? Kind of. The Power 100 is a decidedly unscientific compilation—and proudly so.

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We refuse to rely on one-year returns as a benchmark of influence, just as we equally refuse to use assets under control as a proxy. What we do is look for the large, positive trends in this industry—risk-factor approaches, infrastructure investments, novel advances in risk management—and then ask around (we’re journalists, after all). Who are the CIOs leading the charge in these areas? Who is taking the risks that other, more timid CIOs refuse to? Once we identify this select group, we ask them the obvious question: Who do you believe also belongs on a list of influencers? It’s a painstakingly qualitative approach.

The most enjoyable part of the whole process, however, is speaking to the members of the list. I have often said that this end of the financial system is by far the nicest. There are very few… how do I say this… [redacted] in CIO roles. There are egos, to be sure, but there are decidedly different egos populating downtown Manhattan and London’s Square Mile—and they’re most certainly different from the leading members of Vanity Fair’s effort. You won’t see Jepsen—or David Neal or Chris Ailman, who round out the medals—proclaiming their genius or demanding a video camera’s attention. But if they did, well, it would make for good copy…

“Henrik Gade Jepsen held forth on his Facebook fan page about his ‘exceptional’ portfolio construction skills, while David Neal sold bathing suit pictures of his manager lineup to The Telegraph in Sydney for AUS$2 million. Chris Ailman, meanwhile, revealed that he has had three assistants take an uninterrupted stream of monologue-like dictation since 2003.”

(October 23, 2013) – Hedge funds and alternatives are suffering from a lack of experienced and independent directors on their boards, leading to an industry-wide failing on fund governance, investors have complained.

Pension funds, consultants, fund of funds, private banks, and sovereign wealth funds were quizzed by independent fund governance provider Carne Group on issues of conflicts of interest at long only and alternative funds. The results showed an alarming lack of trust in these fund managers to manage conflicts well.

Some 95% of investors would welcome an industry-generated code of conduct, rather than further regulation, to combat the governance issues, and 83% want fund boards to have a majority of independent directors on them. In addition, 62% want the chairman to be independent.

Investors believe each fund board should have at least three directors, and that two-thirds of them should be independent. Investors claimed there was also a dramatic need for greater levels of transparency between the investment manager and independent directors.

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Another key development in the 2013 survey was that for the first time, a risk management background was considered the most sought after professional skill for independent fund directors, above the previous top entry of having a legal background.

“Fund governance has continued to grow in importance since the 2008 financial crisis. While for some investors it has always been an issue, the bulk of asset allocators are now much more focussed on the issue,” the report said.

“One of the contributors to the survey described it as ‘an undiversifiable risk factor’… Increased volatility in the markets and enhanced complexity of governance as a legal and regulatory issue are also important factors causing institutional investors and consultants to focus more attention on governance.”

The fund managers believed to have the best quality governance were from the UK, followed by Continental Europe, with the North American market ranking third. Even then, the UK fund managers only scored a 6.8 out of a possible 10, whole Continental Europe managed 5.8, and the North American market just 5.6.

Investors believed the conflicts of interest most likely to take place were at a group level, such as the appointment of service providers for a fund from within the same financial group. They are also concerned about trading errors being identified and reported to fund boards correctly, and how investment and other guideline breaches by the investment manager were handled.

The report concluded by offering four key steps to improve governance at the fund board level. They are:

1) To appoint fund boards where the majority of directors are independent and can be clearly identified as such;

2) Ensuring there are four board meetings per year, at least two of which are in person;

3) To appoint independent directors with at least 10 years of industry experience and;

4) To demonstrate awareness of conflicts at a fund and investment manager level with a written conflicts policy.

The full report is expected to be published online in the next few weeks.