Study: Institutional Investment Spurs Greater Focus on Corporate Governance in Hedge Funds

(September 21, 2011) — A new study by consultancy Carne Group aims to show how hedge funds can change the way they operate in order to stand a better chance of attracting and retaining institutional assets.

“The increased focus on the quality of governance on hedge fund boards comes as a direct result of higher levels of institutional investment in hedge funds coupled with the higher governance standards that they require post-2008. In addition, the pace of globalization is relentless, and as a consequence we are seeing investors asking for solid and consistent governance standards that can be replicated across the hedge funds industry, regardless of domicile,” John Donohoe, CEO of Carne Global Financial Services, stated in the study.

Some highlights of the report include:

1. A total of 91% of allocators agree that poor governance would cause them to avoid investing in a fund, even if it met other operational and performance criteria, while 76% of allocators have already decided against investing on at least one occasion due to governance concerns.

2. Over 80% of investors rate fund governance as “extremely important.”

3. 58% of investors interviewed for the study said that an independent director should have no more than 20 to 30 manager relationships.

4. Allocators are more content with governance levels on fund boards promoted by European fund managers than North American or Asia Pacific managers.

The study also cited ratings agency Moody’s, which asserted in its recent note on fund governance: “Corporate governance practices for hedge fund firms are more closely examined today than at any other time in the history of the industry…hedge funds firms have experienced a shift in their investor composition from high net worth individual investors to institutional investors…Institutional investors have shown that they view the evaluation of governance and oversight as it relates to risk management, valuations, operational controls, transparency and the investment process as important as analyzing a hedge fund manager’s investment performance.”

The survey by Carne Group was conducted over the spring and summer of 2011 by surveying the largest allocators to hedge funds globally, receiving responses from allocators accounting for approximately 30% of all hedge fund assets under management.

Read the full study by Carne Group here.